2023 Year in Review and Year Ahead

The Year In Review

This year turned out to be a really good year for the market with a 28% gain in the S&P 500. A full 15% of that came just during November and December, so that the Santa Claus Rally came true this year (after taking last year off).

Looking at the chart for the S&P 500 index, the overall trend for the year was positive (blue line) although there were a few pullbacks during the year.  That is the sign of a healthy market to see these pullbacks so this was not unexpected.  If we cover up everything but January to April, it does appear that the market was going to be flat overall with just some ups and downs during the year.

If we start to remove the cover showing the rest of the year, June strikes me as the month when the market had higher highs than earlier in the year and it started to look like it would be positive rather than flat (orange lines).

We then saw that the market went lower in August through October, but that is not too much of a surprise.  The Stock Traders Almanac has showing that August to October are often the worst performing months of the year.

Stock market chart showing the S&P 500 index with 50 and 200 day moving averages

Courtesy Stockcharts.com

For the most part the year was driven by the Fed as they were watching economic indicators to see if they needed to continue to raise or hold interest rates steady to cause inflation to drop without causing a recession.  They were still trying to get a soft landing to the inflation which started two years ago.

By November, the economic indicators were showing that inflation was going down slowly and approaching the Fed’s goal of around 2%.  At their November meeting, the Fed announced that they thought that rate increases were over and that they might start to decrease in 2024.  

Well, that was what the market wanted to hear and from the chart it is easy to see that the orange line is upward and hasn’t peaked yet.


Chart of stocks vs. bonds prices in 2023

Courtesy stockcharts.com

Comparing stocks vs bonds, stocks did better overall as interest rates came down. Taking a look at a chart showing the stock market compared with bond prices, stocks started 3% lower than bonds but exceeded by June and stayed higher. Bonds improved in November and December as the Fed indicated a probably cap on interest rates. (As the price of bonds goes up, the interest rate, or yield, on them goes down).

Graph showing comparison of stock market vs 10-year treasury note

Courtesy Stockcharts.com

What is even more interesting is to compare the chart showing the interest rate on a 10-year federal bond compared with the price of stocks. If we look at the boxed area from mid-September to the end of the year, we see that the market is returning to a normal state where the interest rate goes down as stocks go up in a beautiful mirror image.

By the way, many professional money managers will invest in what is called a 60-40 portfolio consisting of 60% stocks and 40% of bonds. The reason is precisely what this boxed section shows: that when bonds are doing well, the stock market is not doing as well. Likewise when stocks are doing well, bonds are underperforming. The result is a much less volatile line that slopes gently upward. In other words, your money is still rising in value but without all the ups-and-downs of either the green or the black line.

Reviewing My Predictions for 2023

Once again my crystal ball was cracked and I was only looking through it dimly. My prediction was for a mostly flat year when looking at the year as a whole. Alas, that prediction looked good until April, but by summer I was way off.

I also predicted a market of stocks rather than a stock market. That is, investing in the market as a whole would not do very much, but investing more pointedly into stocks of certain types of companies (called sectors) would work out better. I thought that since the economy would slow down, that areas like consumer staples (think: stuff you buy at a grocery store) and utilities would do better.

I was half-right. During the first half of the year these defensive stocks did well, but then in the 2nd half they didn’t do so well. Instead, investing in growth areas like communications, financial companies like banks, technology, consumer discretionary (stuff you don’t HAVE to buy), and real estate would have done well.

A Look To 2024

Again, the Stock Trader’s Almanac has looked at some of the trends over long periods of time and the first five trading days of January (this year Tuesday the 2nd to Monday the 8th) often sets the tone for the rest of the year. If the first 5 trading days are up, so will the year end. Likewise, if it is down, the year will end down as well. While this is no useful than using the Super Bowl winner to predict who will win the presidency (yes, it’s a thing), the January effect does tend to happen more often than not.

One concern that I have is that the market has moved up so quickly in November and December, that I think it may be ready to pull back 5% to 10%. This is normal, and could offer an opportunity to buy stocks at a lower price than they are now.

I believe that the Fed’s actions will drive the stock market in 2024. That is, the market will be looking for the Fed to not only hold the rates steady, but to lower then two to three times during their meetings in 2024. If they do anything more than is expected (such as more than 2-3, or the drops in rate are more than expected), then the market will go upward as well.

One thing I’d like to see in 2024 is for the market to reflect how the underlying companies are doing rather than just reacting to news or the Fed. In 2023, companies did well, but they didn’t do well enough to justify the 2-month spike at the end of the year. In fact, the October to December information will be coming out in January and February.

Another wild-card that could factor into the market are the current wars in Ukraine and in the Middle East. If either of these resolve in 2024, that will cause spikes in the market (either upward or downward).

Since 2024 is an election year, this has historically been good for the market. Politicians don’t want to do anything that might result in a negative economy during the campaign period, so there will be a lot of status quo activity from Washington. Thus, I’m not expecting any politically-influenced market moves this year.

The market doesn’t like uncertainty, so there is a possibility that the market will become more volatile until November. This could be exacerbated if there are any health issues with the two old men who are likely to be running for President in 2024.

The bottom line is that it is really too tough to call 2024. A well-diversified portfolio will likely do well but will have some of the usual ups and downs in the shorter-term (weeks to months) as various pieces of news affect it. If this has been interesting so far, you may want to check out my prognostications for 2022, 2021 and 2020.

Working With The Nieces And Nephews

One aspect of the market that is new this year is that my nieces and nephews on my wife’s side, who are ages 9 to 15, have had a little bit of investment education from me this summer. As an incentive, I set them up with investment accounts and seeded it with enough money that they can own portions of shares of about 3-4 stocks. I also offered a match to funds that they put in of their own money, but none of them have taken me up on that yet. I will say that I didn’t know about this author doing the same thing, but did take the gameification idea from her article.

One goal in 2024 is to follow Aunt Kim from the article and “gameify” the investing a bit by providing regular reports to them on how everyone is doing. I’m trying to keep this simple (on me) and will probably just track who has the most money and choose each month’s winner from that. That also means that if someone puts in new money, they will be able to “game” the system to put themselves ahead. But considering I’m making the match as a possible investment trade option (ie. an instant 100% return), gaming the system only makes them the winner as they will learn more and have some skin in the game as well.

To add some fun to it, I’ll take a snapshot of my own “fun trading” account at the same time I started their accounts so that we have something to compare to and see if they can beat their Uncle. The question I still haven’t answered is how to communicate the information regularly to them (email? Blog posts? Texts to link to web page?).

Disclaimer: I am by no means a professional investment advisor. Therefore, anything you read is not a recommendation to buy or sell something. In fact, if you’ve read this or any of my other year-end reviews, I can’t even predict what will happen in the market. This is just what it is: an opinion. As my friend says, “Opinions are like noses – everyone has one.”

Posted in Finance.