Here's our take on what happened in the markets in the fourth quarter of 2023.
"Hi Everyone, my name is Clayton Johnson from Squire Wealth Advisors and with me today, I have Nathan Larsen who is also one of our Advisors at Squire Wealth Advisors. Thanks for joining me Nathan."
"Yes happy to be here today."
"Great. We wanted to spend just a little bit of time today to talk about what happened to the markets last year and Q4. Just as a recap because it's been a long year. There's been a lot of things that have happened if you remember from the beginning of the year, the collapse of Silicon Valley Bank, Government shut downs, threats of shut downs, a lot of progress in AI. Just a lot has been going on. Wars that have started, a lot of political turmoil, impending election year. There's just a lot that has impacted markets, so there's no surprise that people may feel a bit anxious about what's going on in the markets and what Nathan and I are hoping today to address is the markets are behaving as expected and really you can look at this and recognize that the markets take all that information and price it in and we have seen some really good results and return on our investments in the markets, despite all the negative things we seem to be seeing, so Nathan can you walk us through a little bit of what happened in Q4 as far as specific asset classes and maybe just last year in general."
"We had a big rally in the markets. The US market was up over 12%.. The International Markets were up, the bond markets were up. Everything was up in Q4 and overall for 2023. It was a very strong year in the markets. You can see that the U.S market was up 26%. Now it is a little misleading because if you go back to 2022, the U.S market had a down year, but a really strong recovery in 2023 and a lot of that recovery came in quarter four. One thing that's important to remember when being an investor is, you have to be in the game all the time in order to get returns when they happen and so if you're trying to time the market you know be in and out day to day or quarter to quarter or year to year, it's almost impossible to capture the return the markets provide. Disciplined investors always get rewarded in the long run and just as an example, if you think about tennis, arguably the best tennis player around is Roger Federer and it you kinda break down the tennis game, there is points, sets, and matches and Roger Federer, the best tennis player out there he wins 54% of his points and if you go to the next level of sets, he wins 75% of his sets and then ultimately 86% of his matches and this is the best player in the world. If you kinda relate that to."
"I mean that's incredible, 54% doesn't seem that great, like that's almost like a flip of a coin that he's gonna win"
"Yeah, that's slightly better than a coin flip, and what's interesting about that example is it's very closely related to the Stock Market, so any one day. If you study all the days historically in the market, 53% of those one days the Market's up. That means 47% of the time the market's down on a one day basis. If you go to the quarter, it's 70% of the quarters are positive and then when you go to the annual, 78% of every year, the stock market returns positively for investors, so that challenge is just that discipline aspect, it's hard to stay in the market when you see it go down 47% of the days, but if you really take a long tern approach, the odds are in your favor, stay disciplined, the market has historically rewarded investors and that's what we expect going forward and so last year, we had a nice recovery from the year before and Q4 was very very strong, so great news for investors and a lot of the news is going to be negative, and it has always been that way. The market's going to do it's thing and the key take away here is, just to stay disciplined."
"It's such a good example, I love that because I mean like you said, Roger Federer arguably was one the greatest to play the game of tennis and it's shocking to think on a point by point basis he's only winning 54% of the time, but the market's the same way, but that's great. We wanted to spend a little bit of time to go into the investments we're giving you, kind of a high level look on how they worked on the International emerging. We want to show you here an image breaking down more specifically certain asset classes and premiums of the market, so when we say premium there's certain parts of the market that have historically have outperformed others. The most well known premium is the market premium, meaning if you invest in stocks versus investing bonds, you're expected to get a better return investing in stocks and the premium is somewhere around six. seven, eight percent if you invest in stocks rather than bonds. Well there are other premiums in the market, premiums like value companies, small companies, for example it's a lot easier for a small company to double it's revenue than it is for a larger company and so their expected performance over the long run is higher, even if there is more volatility, so we track these premiums and we like to tilt towards them in a number of our portfolios."
"And as you can see here, one the premiums we really like is a small value premium. Typically, over long periods of time, we're talking 10, 15, 20 years or more, you find that small companies and small value companies outperform large and large growth companies and the last 10 years have have not been good evidence of that. I mean Nathan and I are constantly talking about it seems like tech stocks and large growth stocks are doing unusually well and their average over the last 10 years has been really good."
"And it is important to remember with that point, it's not that the small value companies have done bad, it's just that the large growth companies have just been way outperforming their averages."
"Yeah exactly, so large growth averages, I don't know what it is off the top of my head, usually it's like eight to ten percent or something like that. Historically that has not been the case the last 10 years, it's been much higher, And we believe the philosophy that we subscribe to is that there's a reversion to the mean and that's not a sustainable long-term investment approach of large growth, so you can see here on this chart, the last quarter, Q4 small value showed a substantial premium over a lot of these other parts. So we just wanted to emphasize you got a small valued well growth which we're talking about, having a good return, really everything returned very well, but it was led by small value companies out there. So Nathan, we've talked about stocks, a lot has happened in the bond market, interest rates, tell us a little bit about what has been going on and in the interest rate market and the bond market and all that."
"Yeah, as we all know we had some pretty high inflation recently and in order to kinda combat that inflation the Federal Reserve started to raising interest rates very quickly."
"And we had a huge raise in interest rates from basically zero to five and a half percent at the FED funds level and that rate was needed, those rate increases were needed to reduce inflation and slow it down a bit, but what's interesting is, we're kind of at a point where the overall market is expecting that interest rates will decrease over time, not a lot, but a little bit and we don't- this is the same as predicating stocks, we can't predict when interest rates are going to go up or down and by how much, but we are in an inverted yield curve environment, meaning you get a higher yield from an interest rate perspective on shorter term fixed income than you do on longer term and that's sort of backwards from what a typical interest rate looks like and all it really tells us, is at some point in the future the collective wisdom of the market is expecting that interest rates are going to come down and that the key for us as money managers and for investors is, let that not worry us or change our plan, we want to stay intermediate on term and capture some of the higher yields on the shorter things, but also lock in interest rates over. You know if we go over a little bit further out on the term, and we just take a balanced approach there, so that we are capturing both sides of it and that's kind of where we're at. So saving the good news is that, savers and retirees that are dependent on some of these fixed income investments we're actually getting great bond rates now and if you roll the clock back two, three years, it was really tough to get any yield on bonds and now we're kind of in four to five and a half percent range, so positive outlook on bonds than where we have been."
"Yeah it's been great. Well Nathan thanks for joining me today, really kind of want to reiterate that what the market's doing right now is exactly what's expected despite the bad news or the good news, the market prices that in we get what the market's expecting as far as our return and it's been great, it's been great the last quarter and the last year and we can expect 53% on a given day we're going to do better on 70 something percent on the quarter and 80 something on a year and it just keeps going up the longer we stay invested and that's the real key to a good financial plan, a good investment strategy is stay in the game, stay involved, and if you try to time it and get in and out, it really ruins the plan, so again Nathan thanks for joining me"
Clayton Johnson, CFP®