2023 Year End Review

This time last year, most economists were calling for a recession in 2023. Inflation was 9% and the Federal Reserve was rapidly raising interest rates in an attempt to lower it. Historically, these conditions almost always lead to a recession. Stock investors braced for further trouble after a difficult 2022. As is typical after a bad year for investors, we experienced large market swings in 2023. The first six months of the year were positive for both stocks and bonds. The next four months were negative for both. We ended the year with a furious rally in the stock market and the bond market in November and December, giving us solid returns across the board for the year. Inflation has dropped to 3%, and the most anticipated recession in history failed to materialize. For the year, the U.S. economy performed better than almost everyone expected it to.

While the Fed may yet achieve the soft landing they are looking for, we are certainly not past the threat of a recession. The economy is definitely slowing, and we will need to wait to see whether it slows enough to keep inflation at bay, or whether it slows too much and dips into recession. Just like the predictions for this year, most economists expect lower GDP growth for 2024 than we saw this year. The yield curve remains inverted, which typically precedes a recession. The Fed has indicated they are open to lowering rates in 2024 to keep economic growth positive. Time will tell, but the Fed, in spite of keeping interest rates too low for too long and letting inflation get away from them, has been very good at keeping the economy growing.

So where does this leave us as investors? Stocks benefit from dropping interest rates, so a slowing economy and lower interest rates are a positive. The economy slowing too much and causing earnings to drop would be a negative. It is also worth noting that valuations in the stock market are extremely high, making stocks more susceptible to big drops if things don’t go well. Bond investors will also benefit from dropping interest rates and a slowing economy. Bonds seem the safer bet right now, but we suspect stocks may do well in 2024, especially if we avoid a recession. If we do experience a recession, we believe it will be relatively mild.

We lost an investment legend in 2023, as Charlie Munger, Warren Buffet’s investing partner, died at age 99. Charlie was always willing to verbalize his opinions, almost always with humor. Here are a few of our favorite quotes: “If I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation”, “Being rational is a moral imperative. You should never be stupider than you need to be”, “Those who will not face improvements because they are changes, will face changes that are not improvements.”  We can all learn much from people like Charlie Munger.

Never hesitate to contact us if you have questions about your investments. Also, let us know if you would like an updated copy of our Form ADV, Part 2.

Wabash Capital