From my November 21, 2023 blog post, And Now for Something Completely Different!, I highlighted trends showing in several of my favorite factors that led me to think we are on the verge of a better market environment. Prior to this, a negative bias certainly existed in the markets; and amongst some clients!
I noted mostly positive trends in factors including interest rates, inflation, unemployment, bond credit spreads, industrial production/capacity utilization and consumer sentiment and I stated that these trends “could be a positive sign for equities and fixed income”. I cannot predict if the markets would go up or down, but the trends all pointed to the potential for a positive surprise.
Sure enough, the positive trends that were noted seemed to be confirmed by news on December 13 that the Fed could be done hiking rates and is contemplating cutting interest rates in 2024.
Certainly, “staying the course” was the right strategy to take and is paying off for D&A clients. For example, the S&P 500 reached a new 52-week high today causing some cheer (see chart below)! Also, many of the diversifying asset classes like small/mid cap equities and international developed and emerging market equities have rebounded nicely in Q4, but have more to go to catch up for their lag in all of 2023.
Fixed income, on the other hand, has been a good place for diversification since many of the sub-asset classes like preferred stock, high yield bonds, and bank loans, have done well in Q4 and all of 2023. Even short term bonds, that are now lagging long term bonds YTD, gave reason for cheer due to their superior risk-adjusted return.
I have been apologizing all year for the weak performance of the diversifying asset classes amongst the broad capital markets, excluding the Magnificent Seven, and have consistently stated that we need to “stay the course” and be patient because no one can “time the market”.
D&A conducted a few strategic tilts in most accounts that included improving the quality of equities and shortening bond duration – and then lengthening again, that helped improve the overall risk/return profile and help most accounts perform well against their benchmarks so far in Q4. We are hopeful that it will continue into 2024 and beyond!