The financial markets turned in a good year, about a reversal of the 2022 performance. Most of the price action up came in the last 3 months, as investors concluded in aggregate that the high interest rates were coming to an end, and that the economy could weather the storm to avert a recession. The Federal Reserve sets monetary policy, mainly through borrowing costs (interest rates). After the July interest rate hike, the Fed left interest rates unchanged in the last 3 meetings of 2023. This excited investors - thinking that rate cuts could be in-store for this year. Often forward-looking expectations carry more weight and are more motivating than the actual results.
The December inflation report showed prices up 3.4% last year. The Fed is predicting that inflation will end 2024 at 2.4%, declining to 2% in 2026. That’s a long-time to await their 2% target. A lot can happen to change their forecasts, I say with prices, employment, etc. January inflation will be released on Feb. 13th, so that’ll tell us the first report on prices this year.
The stock and bond markets responded very favorably in the fourth quarter, much of the full-year gains were logged in the last 3 months! Stocks rose a combined +13% during November and December. Likewise, bond prices rose also as interest rates fell precipitously. The 10-year U.S. Treasury Note, which is the poster child for all types of borrowing, briefly rose to 5% in late October. It sits near 4% today, heading in the right direction. Your money not invested is earning 5% now-a-days in short term Treasury bills or money market mutual funds.
Bonds in 2023 were not the party-poopers like they
were in 2022. When interest rates FALL, bond prices RISE. Bonds of all stripes
rallied a lot after the Fed kept interest rates unchanged at their Nov. 1st
meeting. Similar to the price action of stocks, roughly 2/3 to ¾ of the total
yearly gain in stocks and bonds occurred in the last three months. The bond
price rally turned losses into final 2023 gains of between 3-5% in Treasury
debt, and upwards to +10% in riskier debt like high yield (junk) bonds. I chose
to not hold bonds last year, and just use idle cash to buy Treasury bills near
5% interest payments.
My favored commodity – to offset some of the risks of owning stocks and
bonds - is Gold. Gold prices were down 3% in 2022, while stocks
and bonds got clobbered. Last year Gold rallied $235 per ounce or
+13% to close the year at $2,062, its first year-end close above $2,000
ever. It often does not follow any pattern of pricing, but the higher inflation
and recent wars can be catalysts for price rises. I advocate to store Gold
bullion in safekeeping, or own Gold Exchange Traded funds like GLD and SGOL
that directly track the Gold price and have very low expenses in your brokerage
account.
In 2024, January delivered decent returns as stocks gained about 1.5% on the Dow Jones and S&P 500 Indexes, Gold lost that much, and bonds were a small loss after interest rates rose into the New Year.
It looks like market's could in store for choppiness after the big run into year end. Besides political news, the corporate earnings and the Fed's decision-making could result in some 'backing-and-filling' on prices this Spring.
Stay Tuned!
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