Q4 Commentary: Build a Bridge

Q4 Commentary: Build a Bridge
Sarah Bomhoff, CFA, CIPM
January 16, 2024
Quarterly Commentary

The colloquial “Build a Bridge and Get Over It” should be the market mantra as we wrap up a volatile but very positive 2023 for markets. Looking at the S&P 500 market chart below, we have bridged the rocky chasm that began January of 2022 and now stand roughly level (even a bit above) on the other side.

What changed since last quarter? Inflation numbers indicate its easing, and the Federal Reserve pulled off its “higher for longer” rhetoric. The stock market, eager for signs of a soft-landing where interest rates can be lowered without a preceding economic recession, took flight. Most of the year’s returns had been on the backs of large technology companies; but as recession concerns eased, US small-cap value companies repriced, outpacing technology company index returns during Q41.

The MSCI ACWI net Total Return Index gained 11.03% in the 4th quarter, ending the year up 22.20%. The S&P 500 Total Return Index gained 11.69% in the 4th quarter, ending the year up 26.29%.

Even the lagging bond market celebrated anticipated relief from “higher for longer” interest rates, with the Bloomberg US Aggregate Bond Index gaining 6.82% in the 4th quarter, ending 2023 up 5.53%.

Two years feels like a long time ago. In January of 2022, the US Federal Funds rate was 0%, and three fewer countries were at war. COVID continued to alter supply chains, and inflation was near an all-time high. Can you believe that Generative AI was not a dinner party conversation topic?

Nonetheless, there are some familiar themes from those January 2022 days. Large technology stocks are priced at or above all-time highs, pushing index returns up with them. Like 2 years ago, we are hopeful that inflation will continue to ease. Markets remain very focused on Federal Reserve statements and expected changes to interest rate policy.

Are we “Over It”? We are hopeful that we have crossed the bridge, but it is perhaps a bit too soon to say this with confidence.

What advice can we render during this stage? If the ups and downs of the last two years made you anxious, please give us a call. Now may be a great time to assess your goals and, if appropriate, adjust your allocation to lower risk.

As we examine our philosophy for managing money and apply it to the market today, we continue to focus on the stage of the economic/interest rate cycle. While we have enjoyed the return to historical stock market highs, we are also careful to recognize that recession risk remains. Monetary policy remains tight; and, in our opinion, the Federal Reserve will err towards keeping rates higher for longer rather than repeating the mistakes of the past by lowering rates too early.

Within this higher interest rate environment, we are watching inflation metrics, retail spending, consumer debt, and employment numbers. Ideally, every day that passes brings us closer to rate decreases, a situation that our investment committee has a road map for navigating. We took steps along that road this year by increasing technology exposure and adding to bond maturities for clients with the appropriate risk tolerances. We will continue to implement that strategy as the art (judgement) and the science (data) continue to provide insight.

As of year-end, the market seems to have built the bridge over some very volatile times. While we cannot be sure we are really “over it,” we see reasons for optimism in the new year and look forward to the opportunities it may present. We would love to talk more about your specific strategy, so please don’t hesitate to reach out.  

  1. The Russell 2000 Value Index tracks the performance of small market capitalization companies with lower price-to-book ratios, which shows a company’s market price relative to its balance sheet. The Russell 2000 Value index saw a return of 15.26% in Q4 and 14.65% in 2023. The Nasdaq 100 Index is an index of the 100 largest companies by modified market capitalization that trade on the Nasdaq exchange. It is heavily weighted in technology stocks. The Nasdaq 100 Index saw a return of 14.60% in Q4 and 55.13% in 2023.

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Q4 Commentary: Build a Bridge

Sarah leads our investment committee to shape our investment choices and manages our portfolios.