Dear Clients and Friends,
In keeping with tradition, allow us to be the very last ones to wish you a Happy New Year. The past year has been quite a ride—the past two years, really.
We can summarize the rollercoaster in two statements:
- In 2022, the Dow Jones, S&P 500, and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25%, and 35%, respectively.
- A week before Christmas 2023, all three were in new high ground on a total return basis (including dividends).
Why stocks did this is irrelevant. (Although we have written before about the wonders of stock market volatility and would be happy to share our blog posts with you.) What matters most to us long-term, plan-driven equity investors is not why it happened, but that it did happen.
Specifically, that there was a pervasive and very significant bear market over most of one year, and that those declines were entirely erased the following year for those who didn’t panic and sell at the low. Though other bears and recoveries are not as quick or as perfectly symmetrical as the 2022-23 experience, in the largest sense, that’s how this works.
We recently hosted a client webinar on bear markets and their important roles in successful long-term investing. If you missed it, you can watch a replay on our YouTube channel. Now, back to the annual letter…
As always, we begin the year with a two-part letter: a restatement of the timeless investment principles that guide us (you can find them here) and some musings on current market conditions. Don’t be fooled—the former is far more important than the latter.
Our Thoughts on Current Market Conditions
We remain convinced that the long-term disruptions and distortions resulting from the COVID pandemic are still working themselves out in the economy, markets, and society itself in ways that can’t be predicted, much less rendered into coherent investment policy.
The central financial event in response to COVID was a 40% explosion in the M2 money supply by the Federal Reserve. It predictably ignited a firestorm of inflation. To stamp out that inflation, the Fed then implemented the sharpest, fastest interest rate spike in its 110-year history. Both debt and equity markets cratered in response.
Despite this, economic activity just about everywhere but in the housing sector has remained relatively robust; employment activity has, at least so far, been largely unaffected.
Inflation has come down significantly, though not yet close to the Fed’s 2% target. But prices for most goods and nearly all services remain elevated, straining middle-class budgets. Capital markets have recovered significantly, as speculation centers on when and how much the Fed may lower interest rates in 2024, and whether a recession is coming. These outcomes are unknowable—even to the Fed—and they don’t lend themselves to forming a rational long-term investment policy.
Significant uncertainties abound and a bitterly partisan presidential election looms. The stock market will face significant challenges this year—as indeed it does every year.
Our overall recommendations to you are essentially what they were two years ago at this time and what they’ve always been. Let’s revisit your most important long-term financial goals soon. If we find those goals haven’t changed, we will recommend staying with our current plan.
As always, we welcome all questions and comments, and we look forward to seeing your faces soon, whether it’s in person or on a Zoom. It’s a privilege for us to serve you and your family.
For a printable version of this client letter, click here.