- Jan 21
- 3 min read

Fourth Quarter Investment Report – The Surprising Rally

Almost no one, myself included thought 2023 would be a strong year for financial markets.

The Federal Reserve moved forward with their rate hiking program adjusting the overnight interest rate up to a range of 5.25-5.50%, which turned out to be the largest cycle increase in forty years.

The aggressive interest rate hikes from the Fed led to an inverted yield curve and triggered a regional banking crisis. Both Silicon Valley Bank and First Republic experienced bank runs ultimately leading to their collapse. Soon after, the Fed stepped in to shore up confidence by effectively guaranteeing most depositors, thereby protecting the economy from a deeper emergency.

The S&P 500 finished the year up +24%, Developed International equity markets were up +18.4% and Emerging Markets ended the year up +8.7%.

The dramatic interest rate hikes of 2022, which led to steep bond losses last year did not carry over into 2023. Despite the considerable amount of volatility in this asset class, intermediate and long-term bond yields finished fairly close to where they started the year, while money market investments yielding greater than 5%, finally had their moment to shine.

The outperformance of large capitalization US stocks were driven by the “Magnificent Seven” and a mini mania over artificial intelligence. Just seven big technology stocks - Nvidia, Apple, Microsoft, Alphabet, Amazon, Tesla and Meta representing a staggering 28% of the S&P 500’s market value were responsible for 65% of last year’s gains. One’s portfolio performance or lack thereof can be directly attributed to those investors which held the “Magnificent Seven” versus those who did not.

How The Markets Did Last Quarter?

The final quarter of 2023 ended on a strong note as investors came around to the view the Fed’s fight against inflation was likely over and the next future policy action would be an eventual easing in the Fed Funds rate.

Bond prices staged a large rally which further added fuel to broad market gains. For the quarter the S&P 500 was up +11.7%, Developed International equity markets were up +10.7%, and Emerging Markets were up +6.1%.

Adding support to financial markets throughout the quarter was a continued decline in the inflation numbers along with perceived dovish communications from Fed Chair Powell and his board of governors.

Moving forward into 2024, it may be premature to declare the Fed has pulled off a soft landing, as it takes time for interest rate increases to flow through the economy. It was the late Nobel laureate Milton Friedman, who once said, “Monetary policy works with long and variable lags.”

According to Deutsche Bank, in the past eleven interest rate hiking cycles, recessions typically started about two years after the central bank began raising interest rates. This past hiking cycle started in March 2022.

With that said, if we have learned anything from the past year it is this – making predictions is hard.

This is why for the majority of investors the best policy is to establish an appropriate long term asset allocation commensurate with one’s return objectives and risk tolerance.

Reacting to all the ups and downs of the markets may work for some leveraged institutional players, but it is scarcely a winning strategy for most everyone else.

My advice to investors is to expect the unexpected. For now, it makes sense to remain cautious in the near term yet optimistic over the long run. To quote the late great investor Charlie Munger, “The big money is not in buying or the selling, but in the waiting.”

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Enclosed are your investment reports and advisory invoice for the last quarter. Please feel free to contact us if you would like to discuss our investment strategy for the upcoming quarter. Thank you for your continued trust and confidence.