Navigating Market Shifts: A Recap of 2023 and Outlook for 2024
Investment Committee Recap
The year 2023 proved to be a pivotal one for our Investment Committee, marking a transition from the foundational year of Quantum's launch in 2022 to a year dedicated to innovation aligned with our company's mission and vision statement. Despite the backdrop of significant global events - a banking crisis, the “rise” of artificial intelligence, and the horrific attack on Israel - our commitment to our investment principles remained unwavering. These include focusing on what we can control, which was quite a few things:
Equity Asset Allocation: Early in 2023, clients were informed of updates to the allocation of equities in their portfolios to better match market weightings.
Asset Location: Our trading rules were refined based on extensive research, optimizing the type of account (taxable, IRA, Roth IRA, etc.) for each investment type (equities, real estate, bonds, etc.).
Money Goal Matching (MGM): The launch of our proprietary MGM model matches client essential spending with bonds and flexible spending with equities, which maximizes financial success.
Laddered Bonds: The addition of a new strategy for clients in withdrawal mode, bond ladders immunize the uncertainty in funding shorter-term goals by locking in current interest rates while minimizing interest rate risk.
Investment Principles Brochure: Like rules made of stone, our key investment principles, encapsulated in a new brochure, provide clients with a tangible reference of our 9 time-tested principles.
Tax-Loss Harvesting: Despite a strong market in 2023, tactical harvesting of losses was executed to offset future taxable gains.
Capital Markets Assumptions: Assumptions for expected returns of equities, bonds, and inflation - used throughout our planning and financial models - were updated based on forward-looking market data.
2023 Highlights
2023 underscored the importance of enduring short-term volatility for long-term gains. Despite a bear market early in the Quantum launch in 2022, resilient companies focused on what they could control, leading to growth in earnings and a total return (appreciation plus dividends) in 2023 of 26.3% for the S&P 500 stock index. Was it enough to bring the “Post-Pandemic Monetary & Energy Crisis” to an end? There is no official arbiter of the end of bear markets, but it helps to think of it this way: a hypothetical investment of $1 million in the S&P 500 stock index at the all-time high on January 3, 2022, would have been worth about $754 thousand¹ at the lowest subsequent point on October 12 that year. From that point It would take 14 months to break into positive ground on December 13, 2023. Only a particular species of quant nerds maintains their own chronicle of past bear markets, and I’m one of them. I hereby declare the recent bear market over! Or more accurately, in hibernation until its next temporary, albeit frightening, appearance, and I now add it to the chronicle of bear markets shown in the table below:
At some point, we will do a blog post dedicated to exploring the rich set of information contained in this chronicle and how it should inform the development of an investment policy. For now, suffice it to say that although bear markets are regular fixtures of investing, when they occur, we will know we’ve seen this movie before, and we will know how it ends: with progress and new highs.
2024 Outlook
Which brings us to our outlook for 2024. After a resounding rebound in stocks last year, the market is pricing in a slower pace for growth going forward. The projection as of this writing for profits from an investment in a globally diversified portfolio of companies such as Quantum does is a yield of 6.4%² - known as the “earnings yield”. Wharton finance professor and author of Stocks for The Long Run, Jeremy Siegel, says that the earnings yield is the best predictor of the expected return of stocks above inflation. Currently, the market is expecting the average annual inflation rate over the next ten years to be 2.3%, which means the market’s expectation for stock returns is 8.7% (before investment fees). That suits us just fine – slower and steadier wins the race! This expected return is very similar to the return assumptions used in our planning, and client financial plans have never looked better.
Happy planning in 2024 everyone!
¹ This includes the dividends paid by those companies, which are counted only over full calendar months. Investment fees, expense and taxes are not counted.
² Morningstar.com
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