As we roll into a new year fresh off six weeks of holiday celebrations and overindulging, we are likely feeling a bit more cognizant of our waistlines. It has been said that “you can never be too rich or too thin”, and as we make our New Year’s resolutions this motto may be helpful inspiration to get us back into the gym. This catchy phrase was coined by Wallace Simpson, the colorful Duchess of Windsor who charmed King George VI into abdicating the throne of England in 1936. While I am uncertain of his physical constitution, the decision to abdicate ultimately had the opposite effect on his pocketbook. Hence, one may think twice about heeding this advice.
The Federal Reserve appears to have a contrasting point of view, which is “you can always be too rich and too fat!” After a double dose of fiscal and monetary stimulus following the global pandemic, the Fed has put the American consumer and economy on a much-needed diet. They have removed the low interest rate “punch bowl” and replaced it with the bitter greens of eleven rate hikes over the course of two years. This tough love approach has served to bring inflation in check and tighten the labor market, two of the Fed’s mandates. Despite the monetary calisthenics, we are not quite at our ideal weight. As such, the Fed is currently holding rates steady (the central bank's policy rate remains in the 5.25%-5.50% range) and monitoring the economy’s calorie count.
Meanwhile, there has been another diet craze evolving through the likes of A1C inhibitors. Drugs like Ozempic, Mounjaro and Jardiance have become everyday household vocabulary, and quickly becoming medical game-changers when it comes to treating people with Type 2 diabetes. These miracle drugs are helping to lower blood pressure, reduce the risk of cardiac arrest and stroke, but most notably, have been popularized by their dramatic weight loss effects (thus some recreational users). Americans are shedding pounds at such an astonishing rate that I hardly recognized a few folks while navigating the holiday party circuit, as they had become mere shadows of their former selves. Snack and fast-food companies are taking notice and so is Wall Street, as research analysts demand these companies have a “counter defense” against this wave of healthier eaters. Not a great time for J.M. Smucker’s to be purchasing Hostess Brands (the notion seems “HoHo” hilarious!) Insurance companies are also taking note, as coverage of these drugs is quite expensive. However, “an ounce of prevention is worth a pound of cure,” and investing money in these drugs today will drastically reduce the cost of future hospitalizations and long-term disease for these patients.
Consumers aren’t the only ones shedding weight. Employers are also slimming down by slicing and dicing headcount and shifting their focus to profitability and margin growth. Technology companies shed 257,000 jobs in 2023 alone. Amazon announced 9,000 job cuts in March, on the heels of the 18,000 layoffs they had previously announced in January. The last initial jobless report came in slightly worse than projected at 218,000, and job openings have fallen from 12 million to 8.7 million, helping to dampen upward wage pressure. At the same time, consumers have blown through their excess savings from pandemic stimulus and revolving credit card and automotive debt is on the rise. Falling 10-year yields (rates peaked at 5% and ended the year at 3.88%) have helped stabilize housing starts which are up; however, the size of the average new home build is shrinking from four bedrooms to three, as consumers have lost their appetite for high mortgage payments.
The dieter’s mantra, “the last five pounds are the hardest to lose,” seems to be true for inflation as well. While we are making progress, we still haven’t achieved the Fed’s 2% target (Core PCE is hovering at 3.3%). This stubborn persistent belly fat implies that the Central Bank may keep rates higher for longer than the market is currently projecting which could pose a challenge to equity markets later next year (Fed Funds are currently pricing in 3.7% by Q2 2024 vs. the dot plot of 4.6%.) In addition, it also poses a challenge to the U.S. Government, whose cost of interest on debt has doubled from pre-pandemic times (interest payments have risen from $1 billion to $2 billion a day.)
The stock market, in contrast, does not appear to have gotten the memo as major indices continue to post loftier highs. Much of this move, however, is attributable to a handful of stocks (the magnificent 7) and therein lies the argument that there is plenty of room to run from the remaining 453 companies in the S&P 500, whether we enter a recession or not. We have seen wider breadth and participation in the 4th quarter (which is healthy), and even small caps are starting to catch up, with the Russell 2000 finishing the year up 17.4%.
Artificial intelligence, the buzz word of the year, has also been highly focused on a concentrated list of technology names, however, we believe there are much broader implications across a variety of sectors including biotechnology and the future of medical care, logistics and transportation and the national interest of protecting our energy grid.
Closing Thoughts
When playing poker, it is a traditional practice for the dealer to offer the player immediately to their right the opportunity to cut the deck after shuffling. The purpose is to prevent any type of actual or perceived cheating or knowledge of where a particular card may lie in the deck. Some players believe that cutting “thin to win” (fewer cards) will give them the upper-hand, although there is no factual basis to this strategy. Investing, on the other hand, is not a game of chance. Like dieting, it requires a healthy, balanced and diversified portfolio (menu) of quality managers (ingredients). It is not a short-term fad, but a long-term lifestyle decision. At Ulrich, we are here to help guide you through the ups and downs (the sugar highs and lows) and constant cravings to change strategic course. Together our bodies, minds, and pocketbooks will be better for it!
Regards,
John P. Ulrich, CFP®
President
Whitney E. Solcher, CFA®
Chief Investment Officer
The S&P 500 Index approached a record high as the year closed. Of note, 2023 was the first year since 2012 that the S&P failed to reach a high-water mark. That said, the index was up an impressive 11.7% in 4Q and 26.3% for the year. The tech sector was the clear winner for the quarter and the year (+17.2%; +57.8%) while Energy (-6.9%; -1.3%) was the only sector to register both a 4Q and 2023 decline. Small caps (R2000: +14.0%; R1000: +12.0%) outperformed large caps for the quarter but lagged for the year (R2000: +16.9%; R1000: +26.5%). Growth outperformed value in 4Q (R1000 Growth: +14.2%; R1000 Value: +9.5%) and even more substantially for the year (R1000 Growth: +42.7%; R1000 Value: +11.5%).
Index concentration continued to have a notable impact on returns in 4Q. The “Magnificent Seven,” which comprise over 25% of the S&P 500, accounted for 76% of the 2023 return for the index. Fourth quarter and 2023 returns for the bunch were impressive: Alphabet: +6.8%, +58.8%; Amazon: +19.5%, +80.9%; Apple: +12.6%, +49.0%; Meta: +17.9%; +194.1%; Microsoft: +19.3%, +58.2%; NVIDIA: +13.9%, +239.0%; Tesla: -0.7%, +101.7%. The index would have been up only about 10% for the year without these stocks, and the equal-weighted S&P 500 returned 11.9% in 4Q and 13.9% in 2023.
Global ex-U.S. equities (MSCI ACWI ex USA: +9.8%) performed well in 4Q and for the year (+15.6%) but lagged the U.S. Weakness in the U.S. dollar helped 4Q returns across developed markets (MSCI EAFE: +10.4%; MSCI EAFE Local: +5.0%). As in the U.S., growth outperformed value in the quarter (MSCI ACWI ex USA Growth: +11.1%; MSCI ACWI ex USA Value: +8.4%). However, value outperformed growth for the full year (MSCI ACWI ex USA Growth: +14.0%; MSCI ACWI ex USA Value: +17.3%). Mirroring the U.S., Technology was the strongest sector for both the quarter and the year (MSCI ACWI ex USA Information Technology: +20.0%; +36.3%).
Emerging markets (MSCI Emerging Markets: +7.9%) also did well but underperformed developed ex-U.S. Emerging Asia was the weakest region (+6.7%; +7.8%) for both periods, hurt by China. China was a notable laggard (-4.2%; -11.2%). Latin America (+17.6%; +32.7%) was the best-performing region for the quarter and the year with Mexico (+18.6%; +40.9%) and Brazil (+17.8%; +32.7%) up strongly.
Fixed Income Markets
The 10-year U.S. Treasury yield was volatile in 2023—ranging from an April low of 3.31% post the regional banking “crisis” to the October high of 4.99% and subsequently declining into year-end for a 3.88% close. Falling rates drove returns for the Bloomberg US Aggregate to +6.8% in 4Q and +5.5% in 2023, a sharp contrast to the -1.2% YTD print as of 9/30. Corporate credit strongly outperformed U.S. Treasuries in 4Q (excess returns of 203 bps) and for the year (455 bps). High yield (Bloomberg US High Yield) climbed 7.2% for the quarter and was up an equity-like 13.4% for the year. The yield curve remained inverted, but to a much lesser extent; 35 bps between the 2-year and 10-year U.S. Treasury yields versus more than 100 bps earlier in the year. The Bloomberg Municipal Bond Index soared 7.9% in 4Q, reversing its YTD 1.4% decline as of 9/30; the index was up 6.4% for the year.
The Bloomberg Global Aggregate ex USD Index rose 9.2% (hedged: +5.4%) in 4Q as rates fell and the U.S. dollar weakened. Full-year results (+8.3% hedged; +5.7% unhedged) were also positive but reflected an overall stronger greenback. Emerging market debt indices also posted solid returns. The hard currency JPM EMBI Global Diversified gained 9.2% in 4Q and 11.1% in 2023. The local currency-denominated JPM GBI-EM Global Diversified returned 8.1% in 4Q and 12.7% for the year.
The views expressed represent the opinion of Ulrich Investment Consultants. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from sources that have not been independently verified for accuracy or completeness. While Ulrich Investment Consultants believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Ulrich Investment Consultants’ view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.