In 2022, it seemed as if it was pretty hard to make money in the markets.
Then a year ago, inflation, which many had forgotten about for the previous 10 years due to the Federal Reserve's actions, moved up to over 6%. The Fed had already hiked rates seven times. And with that combo, stocks had gotten crunched. Largely because of these factors, no one was even close on predicting the great market result for 2023.
Stocks did bounce back majorly last year. The S&P 500 was up 24.4% in 2023, the Dow Jones Industrial Average rose by 13.7%, and the Nasdaq led the way with a gain of 43.6%, having lost 33% in 2022.
In between, the recession that so many had seemed to almost be hoping for was a total no show. The inflation rate fell a lot. The unemployment rate didn’t rise past 4%. Gas prices dropped.
It was, as they say, a good year.
The big tech stocks were up a ton last year after getting crushed in 2022. Nvidia and Amazon had been off 55% from their highs during 2022. Alphabet had then been 41% below its high. The biggest stocks certainly made a difference in both years.
The Wall Street Journal recently tried to put the current sizes of each of the “Magnificent 7”—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—into perspective and what they found is pretty impressive. To begin, the market value of these seven stocks combined is bigger than the combination of the entire stock markets of the United Kingdom, China, France, and Japan.
The seven stocks were worth around $1.5 trillion a decade ago. They’ve added more than $10 trillion over the past 10 years. So how long can they last as leaders? For reference, there now isn’t even a single company in the top 10 of the S&P 500 that was at the top in the 1980s.
The only company remaining in the top 10 from the 1990s is Microsoft. By 2010, it was just Apple and Microsoft in the top 10. Nvidia and Tesla were still on the outside looking in as recently as 2020.
And it wasn’t just the Magnificent 7 that were higher in 2023 either. Other 2023 results included the Russell 2000 Index of small-cap stocks closing up 17%, the S&P 400 Mid Cap Index gaining over 16%, and the S&P 500 Equal Weight finishing the year adding almost 14%.
International stocks started coming to life last year as The Morgan Stanley Capital International Europe, Australasia, and Far East index of international developed country stocks increased by nearly 19%.
Here’s a perspective on why it can be quite beneficial to stay with your strategy, even if the current headlines and fluctuations may conspire to try to make you uncomfortable.
Believe it or not, roughly one-third of the stock market’s gain over the last four years came in just the last eight weeks of the year. Only two months out of 48—just 4% of that entire time. And that 4% got you 33% of the total result. No one can anticipate that. It’s one good example of why keeping a longer perspective is so important.
Don’t just focus on only on what stocks are doing today. Look at what their earnings are likely to do over the next year or two, based on the fundamental economic and policy environment—not the noisy headlines. Remember, every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.
Everything is forever cyclical. Bull markets turn into bear markets, which turn into bull markets and so on. We’ll have corrections, bear markets, cycles within cycles, recessions and even those “What the heck was that?” black swan events from time to time. Just facts of investing life.
Being diversified across asset classes is a very good way to help you minimize market volatility—and bouts of high blood pressure. The tradeoff is that you don’t get the big headline index returns, but neither will you likely get the full effect of a bad market move.
Staying the course is always harder than it sounds, as your goals and desires can change over time. Think of “the long run” as just a collection of short runs you just have to deal with.
The great challenge for investors is not to try to predict near-term market direction. Instead, learn to ignore and tune that out. Don’t get hung up on individually good or bad days or weeks.
All the volatility, over time, typically transforms into the returns that bring you to your long-term goals. So we think it makes most sense to focus on your goals instead of the market flips.
Morgan Housel advises us to read lots more market history and many fewer forecasts. His point is that the more you study the history of the markets, the more comfortable you can become with its movements. Good advice.
When “everyone” feels certain about the way things are going to work out, it hardly ever happens that way. That’s why following the consensus can be quite expensive to an investor.
I totally agree with Cambridge University economics professor Elroy Dimson who said, “Risk means more things can happen than will happen.”
It’s been my observation over the years that many investors, economists, and pundits spend way too much time worrying about whatever risks—recessions, bear markets, black swans, geopolitics, etc.—could happen. And in spite of our outstanding record of success in the U.S. market, few people ever think about what can or could go right—another reason to study market history.
In that regard, psychologist Adam Mastroianni observes, “Ever notice that, while lots of people are happy to tell you about Golden Ages, nobody ever seems to think one is happening right now? Maybe that’s because the only place a Golden Age can ever happen is in their memory.”
Inflation’s coming down, the economy’s still chugging along, and I believe the hiking cycle is over. I don’t know if these will be the case throughout 2024, but I definitely feel confident this will be the case going forward over the long haul.
Based on all of these macro trends, I believe this rally continues to be justified.
Michael Maehl is a retirement income specialist and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.944.1790.
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