January 2024 Market Update

When we look at the full year 2023 stocks were up between 10-26% and bonds were up more than 5%.  When we dig a little deeper into stock performance in the US in 2023 there’s one outlier and that’s large growth – it was up almost 44% where everything else was up 10-27%. Still great performance, but not like large growth. That was driven primarily by seven large technology companies that have been nicknamed The Magnificent 7 – Google, Amazon, Apple, Facebook, Microsoft, Nvidia and Tesla.

One area of the markets that we think are priced to outperform are international stocks versus US stocks. This graph on the left shows the price to earnings ratio for international stocks versus US stocks and you’ll notice it goes back 20 years all the way back to 2004, which is hard to believe is 20 years ago, but this is the largest discount of price to earnings ratio on international stocks versus US we’ve seen in over 20 years, so they’re on sale compared to US stocks. Now, we don’t necessarily know when that’s going to turn around and international stocks may do better than US stocks, but we do get paid to wait in the meantime. On the right we have the dividend yields of international stocks minus US dividend yields, which means we’re getting paid about 1.7% more on dividend yields right now in international stocks than in the US.

Inflation

Which brings us to inflation, which is much better than it was 18 months ago, but still not quite where the Fed’s long-term target is of 2-2.5%. If you look back in mid-2022, on the graph on the left, total inflation was a little over 9%. It’s come all the way down; in the last 6 to 7 months it’s been between 3-3.7% – kind of going up and down, but kind of in that range over time. You’ll notice even parts of these green bars below the zero line are actually deflation in energy cost for much of 2023. The one part that’s still sticky here is this blue part, which is shelter cost, and it just takes a long time for us to build more homes, for us to build more condos and apartments, and things like that. So, that’s going in the right direction, it just takes longer than the rest of it. Over here on the right, when we look at services inflation – most things have normalized the one kind of sticky part here is red, which is transportation services -that’s things like car insurance, mechanic services to fix your car. So, we’ve made a lot of progress here in the last 12 to 18 months, not quite where we want it to be, but I expect in the next 6 to 12 months it’ll be close to 2% again.

Diversification

Lastly, it’s important to remember the long-term benefits of a well-diversified portfolio. This chart shows us asset class returns ranked from best to worst in each individual year from 2009 all the way to 2023, or 15 years. When we look along the top at the best performing asset class in each individual year it changes a lot. The other thing that’s important to note is that it’s hard to predict what will be next year’s best performing asset class; same thing along the bottom, the worst performing asset class tends to change over time and it’s hard to predict who will be next year’s lagered. What’s easier to predict is that the asset allocation, which is a mixture of all of the different asset classes, tends to be in the middle over time. Where it really shows up is when we look at long-term averages. The long-term average of the diversified portfolio is actually above the average of each of the individual components; what’s even more important is the long-term volatility, or standard deviation, is actually third lowest amongst all the different asset classes even though it has above average returns during that time. That’s really the benefits of long-term diversification over time, so we don’t have to be right about markets we just have to react correctly to markets.