Soft Landing... So Far; part 2

January 2024

After a down 2022, 2023 was a good year for stocks and bonds.

Investors started 2023 very concerned about small and mid sized banks. The 2022 increase in rates made for large unrealized losses on banks’ (especially smaller banks) balance sheets, triggering a few failures and flashbacks to 2008. Some of those issues persist today.

Inflation softened throughout 2023, giving the Fed justification last summer to pause its rate hike campaign. Long term rates came down a bit, easing the pressure on banks and the panic short term investors had felt in the spring.

October fighting in Gaza sparked fears of a 2nd regional military conflict. While the stress in the the Middle East is more present-day and therefore hard to imagine a resolution, the initial fear seems to have relaxed. It also helps that in the 4th quarter Fed officials signaled the pause would continue for the foreseeable future.

Investors opened their wallets and bought stocks and bonds into the end of the year.

This graphic that looks like abstract art is 15 years’ worth of returns, by asset class. Zoom in for the detail. The takeaway is that asset class returns - stocks, bonds, REITs, international - are random. What was the best performing asset class of 2022 was no indication of what would work in 2023, just as last year’s winners may or may not be this year’s.

The variability of returns highlights the success of diversification - you don’t know what’s going to happen next.

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The economy remains imperfect, but better than expected. Of course, there is debate on which groups of Americans it feels imperfect for, and which it feels better than expected. I think that both aspects continue in 2024 - not a goldilocks economy, and better than expected growth. Economists expect that unemployment will worsen this year, which is giving them fits reconciling the ongoing strength in consumer spending. Most had expected that rising costs coupled with the exhaustion of Covid stimulus would have left consumers feeling tapped out by now.

Stocks and bonds are more focused than usual on inflation and what it means for Fed policy. Elections years tend to be good for stocks. A gentler, easier Fed policy (which we should expect if inflation continues to slow, and definitely if unemployment rises) will be supportive.

Sincerely,

Chip