Climbing a Wall of Worry

What can we learn from 2023 – and can we put it to use in 2024 and beyond?

We have long held that in the short term, the stock market has a mind of its own and will often move contrary to the perceived wisdom of the day. Case in point: While the consensus view of the economy and the stock market was mostly negative entering 2023, when it was all said and done, the S&P 500 delivered an astoundingly positive total return of 26%. The stock market spent the past year “climbing a wall of worry” – an investing adage that has been circulating for over 70 years but is perfectly suited to 2023.

Lessons From 2023

Investors began the year licking their wounds from market declines of 2022, including an 18.1% drop in the S&P 500 and two consecutive years of negative bond returns. Inflation was raging, the Federal Reserve was aggressively raising interest rates in response and most economists were forecasting a recession. In the face of these very real concerns – not to mention a rapidly deteriorating relationship between the United States and China and no end in sight to the war in Eastern Europe – most prognosticators were expecti ng a declining stock market. Yet as we now know, the stock market delivered outstanding returns in 2023, adding to the mountain of evidence that stock market returns are unpredictable from year to year.

Our experience tells us predictions of near-term changes in the macroeconomic environment and the stock market are unreliable. Noted economist John Kenneth Galbraith once stated, “There are two kinds of forecasters: Those who don’t know, and those who don’t know they don’t know.” We agree and believe that basing investment decisions on such forecasts is unproductive.

The good news is that achieving attractive investment results doesn’t require psychic ability. Our approach to your accounts involves diligently researching and selecting high-quality stocks and bonds that are fundamentally sound, durable through the ups and downs of economic cycles and as a group likely to produce attractive returns through full market cycles. Further, once your portfolio is established, we don’t make rapid-fire trades based on the changing predictions of the day. We want to always have your portfolios prepared for an uncertain future and strive to be disciplined and patient investors in helping you achieve your investment objectives and goals.

The rapid change and digitization of the business world enabled by the internet requires investors to adapt their thinking to what is possible.

Looking to the Future

With the lessons from 2023 fresh in our minds, what can we expect in 2024? Just like last year, the prognosticators are highly confident about many things – that a soft landing is assured, interest rates have peaked and will decline amid multiple Fed rate cuts, the economy will remain in decent shape and stock prices will continue higher. Could these things come to pass? Absolutely. Will they come to pass? That we don’t know – nor do we know if the actual events will play out better or worse than the prediction. As we have often said, investors should always expect the unexpected.

One constant we can always expect is the likelihood of change – and the rate of change continues to accelerate as technology rapidly evolves and impacts nearly every business. Legendary investor John Templeton once said (in the pre-internet era) that the four most dangerous words in investing were “This time it’s different.” At the time he uttered that phrase, we think he was correct – but the internet has fundamentally changed the way companies operate. In today’s post-internet era, we believe the phrase “This time it’s very different” is true. We believe the digital revolution that transformed the world over the past 30 years is similar in scope to the paradigm shift brought about by the Industrial Revolution.

The rapid change and digitization of the business world enabled by the internet requires investors to adapt their thinking to what is possible. As we wrote in our Q2 2023 commentary, the dawning of artificial intelligence will only further accelerate the rate of change in the years to come. Because of this, we must remain open-minded to the possibilities of this new technology. Closemindedness is a major risk – we believe it’s essential to continue growing our knowledge base of new companies and industries that are expanding the capabilities of all businesses. We are working steadfastly to ensure your portfolios participate in the exciting developments of the future. As always, our plan is to do this work in a very disciplined fashion with risk mitigation underlying every investment we make for you. The investment possibilities are exciting, but we will continue to be very cleareyed in stringently assessing risk.