Blue HavenMarket Outlook

2023 was a great example of how investing works

By January 16, 2024 No Comments

2023 turned out to be a good year for investors, but it wasn’t without its ups and downs. A diversified market index was up 18% through July, last year. However, by the end of October, most of those gains had disappeared and the same index was only up 5%. Then, seemingly out of nowhere, a big rally took hold; stocks went up 15% the last 8 weeks of 2023 to finish the year solidly in the green. The way last year finished was a reminder to investors that staying the course really can work.

Twists and turns on the way to gains

The graphs below illustrate the twists and turns that the stock and bond market saw on their way to gains in 2023. The first graph shows VT, an all-world stock market ETF. There were three rallies of 10% or more and two declines of 9% or more. In the end, this diversified basket of global stocks still managed to rise 22% on the year. 65% of the entire year’s gain took place from November through December:

Next, we have AGG, which is an ETF that tracks the total US bond market. There were multiple fits and starts in the bond market. A prolonged 7% pullback from April-October was followed by an 8.50% rally to end the year. In the end, the bond market returned 5.65% for 2023:

These ups and downs resemble how markets usually move; markets spend time going up and down. But ultimately, markets generally rise over time. 2023 is a good reminder that staying the course can work. If you’re paying close attention to your portfolio, it was probably frustrating to see mid-year gains given back during the fall months. However, you were rewarded in the end. Successful investing involves being able to see the forest for the trees.

So keep this in mind throughout 2024

The first couple of weeks of 2024 have been quiet: stock and bond markets are both flat to start the year. The beginning of the year is a good time to remember that markets will go up and down. But even though markets go down, they’ve been able to go up on a year over year basis about 70% of the time since 1926. Those are good odds.

With that said, here are two graphs we like sharing with clients to start the year. The first shows the average amount of times the S&P 500 pulls back a certain amount each year. Since 1950, the S&P 500 has, on average, pulled back 5% three times per year:

Our next graph plots S&P 500 annual returns (black bars) versus the maximum intra-year decline (red dots) experienced during that year. In 2023, the S&P 500 returned 24% even though the index declined 10% at one point during the year. Despite an average intra-year drop of 14% since 1980, the index has risen in 33 of the last 44 years:

So when stocks inevitably fall at some point this year, remember these two graphs. A decline of 5-10% is well within the normal range of market conditions. Nor would such a fall imply that the market will not post positive returns on the year. If the market does rise this year, much of the gains will likely be attributable to a random period of outsized returns, like the 8 week stretch we saw take place at the end of 2023.

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