Market Update for November 14, 2023

Here is my current thinking:

I am frequently talking with clients firmly placed on both sides of the political aisle who believe that the political quagmire we are in as a country precludes the possibility of meaningful economic and market gains.  I have a client who wanted to move completely out of stocks in May 2023 due to the pending breach of the U.S. debt ceiling, to others panicking about periodic government shutdowns and the recent lack of a confirmed Speaker of the House.  Republican and Democrat-leaning clients alike express these concerns, and in roughly the same frequency and passion, albeit with different points of contention and reasonings.  I would strongly counter that while some political events DO matter, we cannot generally trade these events with any net benefit to client accounts, and furthermore I do not know an outfit who can/does with any frequency.  Many years ago, under Chuck’s leadership we traded accounts much more frequently, and yet both anecdotally and empirically I can vouch that it did not result in happier clients nor in more positive net client account values.  Even if the number of “wins” were higher than the number of “losses,” on such trades, the total depth of the losses might exceed the total depth of the wins, again rendering the frequent buys and sells less than neutral.  Finally, frequent trading requires more technology, man-hours, and resources in general, driving up costs to the client - another negative.

This is not to say we never trade, change our minds, or need to reallocate.  In fact, for several years now we have consistently offered meetings at least every 6 months instead of every 12 months - the latter being industry average - as the markets change too often for annual reallocations to be sufficient, in my estimation.  As such, I am working essentially twice as hard as the average advisor on your behalf, and in doing so, we hope we are quicker to pick up on market trends and develop a fuller deeper relationship with our clients.

The stock market is now in a seasonal up-trend, and we are up over 7% since the close of the market at the end of October 2023, just two weeks back.  Looking back on historical S&P 500 index closing data, there have been gains in 6 of the past 10 years from November 1 through the subsequent February 1, albeit the last few years have been less strong in this vein, admittedly.  Knowing that October is a historically difficult month, I prefer to think of the market bottoming at some point in October and then endeavoring to make gains thereafter, rather than looking specifically at the 4th quarter.  Many studies have historically pointed to this 4th quarter strength.  I am hopeful that the closing low of 4,117 on October 27, 2023 is the low for this quarter, and last year the 4th quarter low was put in October 12, 2022.  Please note that level was only 3,577, meaning in a cherry-picked last 13-months’ time the broad US stock market has made over 25%.

Much has been made about the narrowness of the gains thus far this year in stocks, as the largest technology stocks have gotten larger, and the rest of the market has been stuck mostly in neutral.  In short, if you own enough of the very largest tech stocks you have had a good year, and vice versa.  I wish my clients owned more of these “magnificent 7” stocks in retrospect: Apple, Microsoft, Tesla, Meta (Facebook), Alphabet (Google), NVIDIA, and Amazon, in no particular order- but to do so would be typically more aggressive than how I tend to manage money for my generally more conservative-leaning clients.

Higher interest rates have hurt bonds and helped fixed annuities and CD’s substantially.  6% fixed rates now exist- it has been at least since 2005 since I could have made that statement, and in many ways these fixed rates are the very highest since I began in this career August 2000.  The two schools of thought about interest rates are as follows:

1) The Financial crisis of 2007-2009 was so disruptive to markets in so many ways that the last 15 or so years have seen abnormally low interest rates and we are only now getting back to long-term average interest rates, which are basically here to stay.  We should expect higher inflation, CD-rates, and mortgage rates than we have grown accustomed to since about 2010, going forward.

2) Interest rates are temporarily higher than the Federal Reserve/U.S. Government would like to see them, and are only where they are to stamp out the embers of inflation north of 2%.  Once inflation is low enough for the Fed’s liking Fed board members will jump at every sign of weakness in the economy to lower their lending rate in an attempt to reduce interest rates more broadly in the economy.  This may be hard to execute, but is necessary to reduce the interest load on the $33.7T+ national debt.

As you might guess, I am in camp #2 above.  While 2.5% 30-year mortgages and 0.5% CD’s might be a thing of the past, I think the Federal Reserve wants to bring us back to something like 5.5% 30-year mortgages, 3% CDs, and 2% inflation, and it is more a matter of when we get back there rather than “if.”  With that, enjoy Thanksgiving, and stay warm!