Play the Ball Where it Lays
A summary of the stock market performance:
Based on the search results provided, here is a summary of the stock market performance in December 2023:
The S&P 500 rose 4.42% in December, bringing its total return for 2023 to 24.23% (26.44% including dividends)[1][10][2].
The Dow Jones Industrial Average gained 4.84% in December and was up 13.70% for the full year 2023 [1][10][2].
The S&P MidCap 400 posted an 8.50% gain for December, with a 14.45% return for 2023 [1] [10].
The S&P SmallCap 600 had a strong month, rising 12.61% in December and finishing the year up 13.89% [1] [10].
The Nasdaq Composite increased 5.58% for the month and had a stellar year, up 43.42% in 2023 [3][6][4][7].
The Russell 2000 small-cap index gained 12.22% in December and 16.93% for the year [4] [7].
In the bond market, the Bloomberg U.S. Aggregate Bond Index rose 3.83% in December, finishing 2023 up 5.53% [4] [7].
Technology stocks were the top performers for the year, with the sector up 56.39% in 2023 [2].
The market rally broadened in December, with small-cap and value stocks outperforming for the month [4] [7][5].
The strong December performance capped off a surprisingly good year for stocks, defying earlier expectations of a potential recession[6].
Overall, December 2023 saw significant gains across major stock indices, contributing to a very strong year for equities, particularly in the technology sector. The market rally, which had been concentrated in large-cap tech stocks earlier in the year, broadened to include small-caps and value stocks by year-end.
A summary of the bond market performance in December 2023:
Fixed income markets rallied significantly in December, continuing the strong performance from November. This rally was driven by expectations of global central banks shifting towards more dovish monetary policies[7].
The yield on the 10-year U.S. Treasury fell 48 basis points, closing the month at 3.88% [7]. This was part of a broader trend of falling yields along the Treasury curve, particularly for intermediate and longer-dated maturities.
The Bloomberg US Aggregate Bond Index returned 3.83% in December, contributing to a total return of 5.53% for 2023[8].
Longer-duration bonds, such as 30-year Treasuries and investment-grade corporates, were among the top fixed income performers in December[9].
Credit-sensitive sectors like bank loans and high-yield bonds provided strong returns. The average fund in both the bank loan and high-yield bond categories gained 12.1% for the year [8].
The bond market rally in the fourth quarter was particularly strong, with the Morningstar US Core Bond Index gaining 6.6% in Q4 alone [8].
High-yield bonds performed exceptionally well, with the Bloomberg US High Yield CCC Index climbing almost 20% during the year [8].
The rally in bonds was broad-based, with global government bonds (hedged to USD) rising 2.9% in December and 6.7% for the year[10].
Global investment-grade corporate bonds (hedged to USD) increased by 3.8% in December and 9.1% for the year [10].
The strong performance in December capped off a year that saw a significant turnaround for bonds, especially in the last two months of 2023, marking the best two-month return for the Bloomberg US Aggregate Bond Index since 1982 [9].
This rally in the bond market was largely attributed to changing expectations about future interest rate policies, with markets anticipating potential rate cuts in 2024. The strong finish to the year helped many bond categories recover from earlier losses and post positive returns for 2023.
Commentary:
I would like to be able to say that this year was abnormal, with his highs and lows, disconnected economic data from the stock prices and bond markets, and all the other craziness that goes on in the general world, but it's not. Being on the correct side of the market is something that is very difficult, because no one has a crystal ball, many of the actions are out of your control, and sometimes the markets don't do what they're supposed to do.
Using the sports analogy, Investing is often like Golf. You can do everything perfectly, have the right equipment, have the right swing, connect with the ball correctly, but out of nowhere as that ball is flying, a gust of wind comes by and blows it off track. You end up landing in the rough. Now the next shot comes out of that rough perfectly flying and then lands sprinkler head, bounces over the green and then to the water. You did nothing wrong, yet nothing went your way. There are things you just cannot control. Similarly, these unexpected things can mask poor shots. My son was playing in a golf tournament in September of this year. He had a monster drive off the tee, but it started to fade too much to the right and it was headed right for the water hazard. About 1/3 of the way down the water hazard was a 3-foot wide one foot tall sign that said “do not swim in the water”. My son's ball hit that sign perfectly and it deflected enough not only to bring the ball back into the middle of the fairway, giving him an extra 25 yards on the drive in the middle of the fairway. One can say that he had a great shot, which looking at the results may be true (320 yards total drive), but the risk that he took by fading his shot versus another player who hit his iron off the tee and when 220 years down the middle, completely avoiding the water hazard. Those plays are not the plays that are highlighted on ESPN, it is what the golf coach calls boring golf.
This year was racked with shots that should have been in the water but were saved by sudden winds that push the ball back into the fairway, signage the ball hit that bounced into the fairway, and some intervention by rules officials (government spending) to give Wall Street and politicians what they wanted. Meanwhile, many of us who chose to play it safe, were ultimately left with the short end of the stick.
Keith McCullough, in an interview with Charles Schwab’s Chief investment Officer, Liz Ann Sounders, said, and the data backs it up, “When the S&P 500 goes down 0.1%, the CNBCs of the world say, 'Hey, it's not that bad.' But it's 10 stocks that are making sure that happens. There's a raging bear market in small caps, mid-caps, real estate, regional banks..."
Is the emperor wearing no clothes, or are the cross winds much stronger or lighter (due artificial forces)? Time will tell. The signals are all around us. For example, an excerpt from Real-Time Macro by analyst Christian Drake.
“Our actions have moved our policy rate well into restrictive territory.” – Jerome Powell, December 13
In an amusingly tragi-comical bit of poetic irony, the Fed's channeling of the Panderstone and (inflation) "Mission Accomplished" declaration has been immediately chased by a spike in oil prices, a large-scale supply disruption, a rise in small business Compensation Plans (which happens to lead wage inflation), an acceleration in Supercore Inflation and a Median Wage Growth print holding at 2.6X target.”
In other words, the marketing immediately reacted by stating, if inflation is now under control that means we have to adjust our expectations on asset pricing and pricing goods and services.
Conclusion:
As we prepare for 2024, we are still letting the data drive the science behind our portfolios. Great academics and practitioners have proven there is a methodology and science that works in investing. I could list example after example of why having a broad basket of diversified stocks and bonds across multiple asset classes, sectors, factors, and international borders provide you with a smoother overall expected return on a risk adjusted basis compared to add concentrated propose. In addition to that, there are times to make small force corrections within that scientific framework that allows Investor to take advantage of opportunities or protect against downside that might come up.
Going back to my son’s golf tournament in September, the 320-yard drive that was assisted by the 3 feet by 1 foot signage, gave my son a lot of confidence leading to a birdie on that hole. While his competitor, who played it safe, ended with a par. Different song in a different tournament, earlier this month, he was tasked with a very difficult shot. Despite having the right drive and the right approach shot, the ball took a bad bounce and ended up off the green in a terrible spot. He was able to be creative with how he approached the shot and was able to bounce the ball off the hill that blocked his view of the pin just enough where it rolled right next to the hole. I would never be able to hit that creative shot. I would have followed the science and laid up, to two putt for a bogey.
Investing is a long-term game. You may find yourself out of position not because of anything you did or didn't do wrong, but because sometimes markets just don’t go where they should. There were factors that were out of your control. The science indicated to us that the market would have a significant pull back in 2023, as a result we took a defensive position and ultimately underperformed the markets.
Looking forward to 2024, what are we going to expect? As we move into a presidential election year, we have seen the effect of government spending can keep markets higher than what they should be. There are still headwinds and signals pointing down, but we are going to start to slowly deploy some cash over the next several months as we are cautiously optimistic that, due to the US elections, at least for the first 10 months of the year you should have a positive trend. We are staying ultra short on the bonds and focusing in on broad market exposure in the equities.
Model Performance Update
Our Moderate model portfolio returned .18% during the Month of December and finished the month with 1.04% Year To Date (see charts below).
The current view of Hedgeye is unchanged. Hedgeye remains of the view that stagflation/deflation will play out in the 1st quarter of 2024.
Changes to the model portfolio in December
- Initiated 2% position in SHY
- Initiated .5% position in SIVR
- Increasing DBA position to 2%
- Increasing AAAU position to 3%
- Increased GDX position to 1%
- Initiated 1% position in EBND
- Swapping PQTIX for FMF in small accounts to avoid $24 transaction fee
December 2023 performance with benchmark
2023 Year to Date Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one to one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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[1] https://www.spglobal.com/spdji/en/documents/commentary/market-attributes-us-equities-202312.pdf
[2] https://www.cnbc.com/2023/12/28/stock-market-today-live-updates.html
[3] https://www.nasdaq.com/articles/monthly-market-wrap-december-2023
[4] https://www.ccmg.com/benchmark-review-monthly-recap-december-2023/
[5] https://www.breckinridge.com/insights/details/december-2023-market-commentary/
[6] https://www.morningstar.com/markets/15-charts-surprise-everything-rally-2023
[7] https://www.wstam.com/news/market-updates/december-2023-fixed-income-markets-review/
[8] https://www.morningstar.com/funds/how-bond-funds-fared-2023
[9] https://www.wstam.com/news/market-updates/december-2023-fixed-income-markets-review/
[10] https://www.rothschildandco.com/en/newsroom/insights/2024/01/wealth-management-monthly-market-summary-december-2023/