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Quarterly Client Update Q4 2023

The cold and snow have finally arrived in Chicago and our kids have been enjoying some sledding. Most years it seems like we have forecasts for large amounts of snow that turn out to be just a couple of inches. This past week, the forecasts were quite reliable.

The accuracy of the predictions around the latest snowfall turned out to be far more accurate than the predictions many top economists made for 2023. More than two-thirds of economists at 23 major financial institutions expected a recession during 2023 and predicted that the markets would move significantly lower. Yet many factors, including stronger than expected GDP growth in the US, led to significant stock market returns. Expectations were exceeded and the US stock market went up 12.07% in Q4, 25.96% in the total year.1

“Expectations exceeded” may sound simplistic, especially when considering the headlines that came out during the past quarter. Headlines such as “US Reaches Debt Ceiling,” Signature Bank Fails,” Credit Suisse Collapses,” First Republic Bank Fails,” and “War in Gaza” do not typically indicate a strong stock market. Yet the market is forward looking and constantly adjusting with new information. So even when the year started out with low expectations, like the many of the major economists had predicted, and even when there are headlines that seem to confirm a negative outlook, the stock market can perform well—with better-than-expected information coming from businesses.

Last year the “Magnificent 7” tech stocks (Apple, Google, Microsoft, Meta, Telsa, and Nvidia) got most of the attention—rightly so with 111% average return (though, to be fair, the average return in 2022 was -45.2%).2  It was not just very large tech companies that did well, however—mid-cap stocks returned 17.23% and small-caps returned 16.93% for the year (both well above the long-term average).3 Outside of the US, developed countries returned 17.2% and emerging markets returned 11.7%.4

The lesson to be learned from the difference between expectations and reality is that short-term predications should not dictate asset allocation decisions. How you are invested should be based upon your unique situation and not predictions about where the market will be in the short term.

Given that, as we look ahead to 2024 it is a good time (especially after a year with significant returns) to remind ourselves that there will be periods of negative performance in the future—an expectation certain to be met. But negative performance during a calendar year is not necessarily a sign of worse things to come; it is merely a result of a functioning marketplace in which prices are adjusting with new information. On average, the stock market will be up 3 out of 4 years and the following data points include those years, showing that this is common stock market behavior. A mild correction (5% off of highs) happened 3.4 times per year from 1928–2023. A normal correction of 10% happened 1.1 times per year and a bear market (20% decline) happened 0.3 times per year, or about once every 3.5 years.5 All of us are wondering what 2024 will hold. The frequency of these declines reflects the reality that to achieve the long-term returns of the stock market, we must be prepared to endure difficult times. Now is a good time to remind ourselves so that we have the fortitude when these times come. Though, if you’d like to end with a more uplifting thought, markets have historically performed well in election years. We shall see what 2024 brings us! In the meantime, we will continue to rebalance your portfolios back to your targets as needed. We will also be preparing tax information soon and will be in contact with all of the documents as soon as possible.

Please do not hesitate to call or email with any questions.