Wrapping Up 2023

As we all know, December is a month for “to-dos.” Holiday gatherings, shopping, and annual traditions make the month fly by. This past weekend, I checked off one of my to-dos: baking five dozen cookies for a cookie exchange. It was a labor of love but a fun annual tradition. As I continue to cross things off my list, I’m reminded that the end of the year is in sight and reflect on all that that’s happened this year.

2023 was a year of surprises for investors. When we started the year, the average 60/40 portfolio was down around 15% from the previous year. We then witnessed a banking sell-off, AI (artificial intelligence) mania, war between Israel and Hamas, and four 0.25% rate hikes from the Fed … just to name a few. Given the uncertainty of the year—and fears of a 2022 repeat—investors gravitated towards cash and added $1.1 trillion to their cash holdings in 2023. This seems like a reasonable response as the Fed funds rate now sits around 5.25-5.50%. However, with hindsight, many investors would have been better off investing in other asset classes.

Year-to-date, the S&P 500 Index is up about 23% and just seven stocks (Meta, Tesla, Alphabet, NVIDIA, Amazon, Microsoft and Apple) now make up about 30% of the index. They have jumped 75% in 2023. The other 493 companies are up around 12%. While returns in the first half of the year were primarily driven by these seven stocks, the market broadened out in the second half of the year as economic data came in better than expected.

What many forget is that those same “magnificent seven” stocks were down 40% in 2022 while the remaining 493 stocks in the S&P 500 Index were down about 12%. While it certainly paid to be concentrated this year, we know that over longer time horizons, this can create volatility that is hard to stomach for many. Tech-related mutual funds experienced outflows of $7.9 billion in 2022, then inflows of around $4.1 billion in 2023—implying investors got spooked and either remained in cash or diversified their assets and missed out on recovery. This result supports sticking to your allocation and avoiding short-term timing.

The chart below shows the percentage of mutual funds that lost money in a given calendar year. As you can see, last year, 94% of asset classes lost ground. The silver lining was tax-loss harvesting opportunities, with losses typically available to rollover for subsequent years. On the flip side, this year, only 9% of asset categories had negative returns. Overall, it was a good year for both stocks and bonds (not just a handful of stocks). Within our portfolios, we have begun to add back to small-cap stocks, which we believe have been disproportionately affected by higher interest rates and negative recession sentiment.

With yields at decade highs and a high probability of rate cuts beginning in March, we see opportunity in fixed income. Investors sitting in cash may want to consider allocating to bonds to lock in higher rates and match duration with their personal time horizon. For more on this topic, keep a lookout for our 2024 Outlook in the coming weeks.

As we close out the year, I encourage you to add one final “to-do” to your list: think about the purpose of your assets. Have your goals changed? This time of reflection may help to bring clarity. With our updated capital market assumptions, it may be time to adjust your asset allocation. Our Johnson Financial Group advisors are here to help you evaluate and cross off one more item on your “to-do” list.