“The future ain’t what it used to be.” –Yogi Berra
It’s an optimistic time of year. New Year’s resolutions have been made–and some already broken. A sense of normalcy is on the horizon with a return to work and school. There is hope that markets continue their 2023 performance further separating us from the pain of 2022. Amidst all this, our firm finds entertainment from all the 2024 market prediction articles circulating among financial services media and asset managers.
At Strategic Advisory Partners, we love predictions. Not to make them, but to make fun of them. The idea that the average asset manager, let alone investor, can consistently predict the direction of any market or instrument reliably enough to beat a passive index over a very long time period is amusing to us. It’s akin to your friend saying they can beat the 12th man on an NBA team in a game of 1-on-1. You may not actually laugh out loud, but internally, there’s a sense of amusement. That’s how we feel when we read or hear market predictions.
In this month’s note, we discuss why predictions can be perilous territory, often leading to emotionally driven investment decisions only to justify them intellectually. Additionally, we share why we feel so strongly about flipping the order to start from the intellectual standpoint, which we believe means having a systematic and repeatable investment process.
But first, here’s a summary of our take on what transpired in the markets in December.
U.S. Equities
Exposure will decrease but remain overweight. Trends over all timeframes are positive, but a small portion of exposure will be handed back to other strengthening equity asset classes. Within U.S. equities, exposure will remain skewed toward growth and large caps. Value, mid, and small caps have regained uptrends over all timeframes but remain relatively weaker.
Intl Equities
Exposure will increase but remain underweight. Both foreign developed and emerging market equities now have intermediate-term uptrends, with the former also gaining a long-term uptrend. The relative weakness of international equities versus U.S. will subdue allocation increases to minor adjustments.
Real Estate
Exposure will increase and return to baseline status as the long-term trend joins the intermediate-term trend in positive territory.
U.S. & Intl Treasuries
Exposure will increase and return to baseline allocation, as some long-term trends in the asset class have become positive. The relative strength of nominal bonds versus inflation-indexed bonds will continue to boost the allocation, pushing it to baseline despite having some long-term downtrends.
Inflation-Protected Bonds
The intermediate-term trend has switched from declining to increasing, but the relative weakness of the asset class versus nominal Treasuries will keep exposure at its minimum.
Alternatives
Exposure will not change, as trends in gold remain positive across both timeframes.
Short-Term Fixed Income
Exposure will continue to decrease to its minimum as higher-duration fixed income instruments strengthen.
Asset Level Overview
Equities & Real Estate
The late October kickoff of the Santa Claus rally extended into December. U.S. indexes pushed to new yearly highs and are poised to challenge new all-time highs as the year concludes. In the final push of the fourth quarter, the S&P 500 Index rallied an impressive 15% since its October 27th low. This robust and widespread surge bolstered every major cap size and style, even lifting value and dividend stocks that trailed behind earlier in 2023. Despite the year’s challenges, U.S. equity returns are on the verge of being above average, signaling an important lesson for investors to trust the trends.
Internationally, returns were a bit more mixed in December. Foreign-developed equities generated a modest gain to finish up double-digits. However, emerging markets lagged due to underperformance among Chinese equities, which are the largest component of emerging markets. Ending the year at new 2023 lows, China’s equity markets stand out negatively amidst the bullish global equity landscape, warranting cautious observation.
Amidst the Federal Reserve’s forthcoming dovish stance, real estate assets have staged a comeback, reversing persistent downtrends to budding uptrends. This shift signifies a return to baseline allocations for Strategic Advisory Partners portfolios after nearly two years.
Fixed Income & Alternatives
As short-duration fixed income recently rivaled crypto in popularity, easing rate pressures surged bond prices ahead, leaving short-duration returns trailing. While the equity returns since October’s end have been remarkable, long-term bonds have been even better. During this period, the S&P 500 Index registered a 15% surge, while the 20+ Year Treasury Bond Ishares ETF (TLT) soared almost 19%. The evolving uptrends across fixed income instruments will cause Strategic Advisory Partners’ portfolios to increase exposure.
Amidst the December dip, gold prices regained strength, reaching a new high in 2023 closing prices. As the year ends, trends continue to be positive, maintaining exposure in our portfolios at their baseline allocation.
Sourcing for this section:
Barchart.com, S&P 500 Index ($SPX), 1/1/1980 to 12/26/2023; Barchart.com, Dow Jones U.S. Index ($DUSA), 8/1/2006 to 12/26/2023; Barchart.com, Nasdaq QQQ Invesco ETF (QQQ), 3/1/1999 to 12/26/2023; Barchart.com, “China Largecap Ishares ETF (FXI), 1/1/2023 to 12/26/2023; Barchart.com, 20+ Year Treas Bond Ishares ETF (TLT), 10/1/2023 to 12/26/2023; and Barchart.com, Gold Trust Ishares (IAU), 1/1/2023 to 12/26/2023
3 Potential Catalysts for Trend Changes
Soft Landing Imminent?
The personal-consumption expenditures (PCE) price index fell 0.1% in November, marking its first decline since mid-2020. Year over year, prices escalated by 2.6%, aligning closely with the Federal Reserve’s 2% target for annual price increases.
Spending and Hiring:
Consumer spending surged by 0.2% in November, surpassing October’s 0.1% increase. This upward trajectory signals growing confidence in the economy among American households. Additionally, the labor participation rate for workers aged 25 to 54 is nearing a 20 year high.This could ease employers’ challenges in finding workers and help curb wage hikes that might otherwise drive broader inflation.
Housing Turnaround:
Mortgage rates dropped to the lowest level since June.
According to Freddie Mac, the average rate for a standard 30-year fixed mortgage declined about a quarter percentage point to 6.67%. Rates are down more than a full percentage point from their recent peak near 8% this fall. Coincidentally, home sales rebounded from a 13-year low in November. The National Association of Realtors noted that existing home sales, which comprise most of the housing market, increased 0.8% in November from the prior month.
Sourcing for this section:
The Wall Street Journal, “Prices Fell in November for the First Time Since 2020. Inflation Is Approaching Fed Target.” 12/22/2023; The Wall Street Journal, “Mortgage Rates Fall To 6-Month Low,” 12/21/2023; and The Wall Street Journal, “Home Sales Ticked Up in November After 5 Months of Declines,” 12/20/2023
Don’t Make Investment Decisions Emotionally, Then Justify Them Intellectually
“Without data, you’re just another person with an opinion.” –W. Edwards Deming
In a note from last year, we revisited Sean Williams “12 Stock Market Predictions for 2023.” At the time, things weren’t looking promising for those 12 predictions.
Checking back on those predictions as the year concludes, we see the final accuracy rate is around 8%, 1 out of the 12. Williams shouldn’t feel too bad, as he’s not alone in this.
Let’s be clear, we’re not good at predictions. That’s precisely why we don’t make them or believe others can consistently do so. Instead, we steer clear of predictions and rely on the polar opposite: a rules-based, systematic, and repeatable process for portfolio management.
What matters is not what you think will happen, but what you do with that thought. In other words:
● When do you enter the market (buy)?
● How much do you buy?
● When do you exit to increase your chances of leaving with a profit (sell)?
● When do you accept defeat to avoid potentially catastrophic levels of losses (sell)?
These pivotal decisions determine outcomes over time. Predictions can fuel emotional decisions and intellectual justifications. Conversely, employing a repeatable process for making investment decisions begins from an intellectual standpoint. History tells us that starting from the intellectual standpoint gives investors a better chance of attaining two things:
1) Achieving the investment goal
2) Managing emotions during periods of euphoria and fear in the market
We believe that consistently successful asset managers rely on process over prediction. Even when an investor makes decisions on discretionary factors instead of algorithmic ones, it is possible to do so with a process that is rooted in odds rather than predictive opinions.
For example, some might call Warren Buffett’s decision on an investment a prediction, but what we see is a calculated, systematic bet he has made based on a variety of fundamental factors.
As you know from reading our Monthly Asset Allocation Updates, we believe in and act on systems, recommending regular rebalances to tilt portfolios toward stronger assets and away from weaker ones. Our goal is to remove speculation and anxiety regarding the market’s direction for our clients.
As we step into 2024, our focus remains the same: We are committed to serving our clients. We are and will continue to make sizable investments in new ways to help you thrive.
Disclosures:
Strategic Advisory Partners is an investment advisor registered pursuant to the laws of the state of North Carolina. Our firm only conducts business in states where licensed, registered, or where an applicable exemption or exclusion is afforded. This material should not be considered a solicitation to buy or an offer to sell securities or financial services. The investment advisory services of Strategic Advisory Partners are not available in those states where our firm is not authorized or permitted by law to solicit or sell advisory services and products. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information, please visit adviserinfo.sec.gov and search for our firm name.
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.
Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.
Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Strategic Advisory Partners.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
