The Markets	12/31/23 Close	09/30/23 Close	4th Qtr. Change	12/31/22 Close	12 Mo. Change	YTD Change
Dow	37,690	33,507	+12.48%	33,147	+13.71%	+13.71%
NASDAQ	15,011	13,219	+13.56%	10,466	+43.43%	+43.43%
S&P 500	4,770	4,288	+11.24%	3,840	+24.22%	+24.22%
MSCI EAFE	2,236	2,031	+10.09%	1,944	+15.02%	+15.02%
10-yr Treas. yield	3.87%	4.57%	-0.70%	3.88%	-0.01%	-0.01%
Fed funds rate	5.25-5.5%	5.25-5.5%	n/a	4.25-4.5%	+1.00%	+1.00%

(stock indices are before dividends; yield and rate changes are absolute changes)

While there is plenty of bad news in the world (see Looking Forward), investors have little to complain about. Not only did the economy defy predictions of a recession in 2023, but the stock market also exceeded expectations with the Dow hitting an all-time high, large tech stocks roaring back and the S&P 500 flirting with its high from January 2022. Interest rates drifted steadily lower, providing some relief to both borrowers and bond investors, while cash and CD holdings still paid 5% or more. International stocks made up some ground, gold reached a new high and bitcoin jumped in advance of the approval of new cryptocurrency funds.

The Fed paused interest rate changes for the quarter but indicated inflation was still “elevated” despite its decline. All inflation measures were down, with the Fed’s measure of core inflation at 3.2%. Prices for some goods (autos, appliances, recreational supplies) are actually lower but housing costs, up 6.5%, still make up 70% of inflation. Inflation was projected at 2.4% for 2024 and 2.2% for 2025, with projected interest rate cuts of 0.75% in 2024, up from the previous 0.50%. China actually slipped back into deflation, with exports declining for six months, but Japan is finally seeing some price increases to end 25 years of stagnation; Japan is also abandoning its policy of zero, and even negative, interest rates it has maintained since 1999.

Issuance of Treasury securities is up significantly to $2 trillion this year, while the Fed is reducing its Treasury holdings by $60 billion/month. Foreign demand is 1/3 lower than it was 10 years ago, so shorter-term bonds are being used to stabilize the market. Still, the Fed’s rate pause, slowing inflation and expectations of rate cuts halted the benchmark Treasury’s rate rise in mid-October, after touching 5%, and falling steadily to its close.

Despite mortgage rates falling steadily to around 6.7% from nearly 8%, sales of new and existing homes declined (hitting a 11-year low in October), inventory of existing homes is still well below a balanced market and prices are up over 4%. Productivity increased at twice the pace of the second quarter, helping slow increases in labor costs. Manufacturing contracted for the 13th straight month although durable goods and core business investment were steady.

The final reading for third quarter GDP growth was 4.9%, a healthy increase from the second quarter’s 2.1%, and the Fed’s revised forecast for the fourth quarter is 2.6%, up from the prior 1.7% forecast. Business investment rose a robust 2.6%, inventory increases added 1.2% to GDP, retail sales were up 3.1% and the personal savings rate leveled out around 4.1%. Consumer confidence, both current and expectations, rebounded in December but leading economic indicators were down over the last six months, with weakening housing and labor markets. With the end of Hollywood and auto worker strikes, unemployment slipped back down to 3.7%, with wage increases slightly outpacing inflation.

Government shutdown was averted again in early November but other deadlines are fast approaching on January 19 and February 2. There were unfortunately several notable deaths during the quarter, including Henry Kissinger, Rosalind Carter, Sandra Day O’Connor and Berkshire Hathaway’s Charlie Munger.

Looking Forward

We often have conversations with clients about the current state of the world, typically prompted by their feeling that our way of life is either doomed or under great stress; this fuels their concerns and anxiety. Rather than looking at a pending economic issue, let’s take a broader look at the state of the world.

There are unquestionably plenty of things to be worried about, and this is not even an exhaustive list.
• Politics are extremely polarized and divisive, and the majority of voters don’t like either of the two front runners for the presidential election.
• The war in Ukraine slogs on, not quite a stalemate but with neither side making much progress.
• The Middle East has erupted in war with the Hamas attack on Israel and the Israeli offensive in Gaza, with Palestinians caught in the middle.
• The US has not had a functional immigration policy in decades, even as record numbers of people are crossing the border.
• Inflation has slowed but price increases have put pressure on everyday necessities. Housing in particular has become even less affordable, with mortgage rates up but house prices stubbornly high.
• Government deficits continue to grow to the point that they may further impact our ability to govern.
• Global warming continues with growing environmental and economic consequences.
• Homelessness, petty crime and addiction are all growing and seem intractable.

Taking a step back, and looking at history, there truly is nothing new under the sun. We have been through all these things to some degree, and much worse, and have not only survived but have thrived. Still, that feels detached and abstract, so here are some more personal ways to process and deal with it.

Give yourself something to look forward to – Quite simply, this will shift your focus from the negative to the positive. The danger is that you only look for “big” things which are not that frequent. Better to appreciate the little things like a good meal, seeing loved ones or even getting outside on a beautiful day.

Choose something positive to share – A positive thing is beneficial, but sharing forces you to look outside yourself.

Seek support – Support is not commiserating with someone who shares your fears; that just digs the hole of despair deeper. Support is acknowledging and processing your fears so you can focus on other things.

Take breaks – Unplug and separate yourself from the sources of bad news, if only for a short while. A more difficult break is to add other sources which are not always in agreement with your opinions. The biggest step is to significantly reduce the time and energy spent on digesting polarizing media.

Become clear about what you can control – Once you recognize what you can control, you will be better able to keep things in perspective. No one person can end wars, fix government or fool mother nature but each of us can choose how to use our time, money and energy. Do not sacrifice your free will and autonomy to the doomsayers.

Our Portfolios

We are deluged by contacts from investment providers who are eager to sell us their investment product or approach which is “perfect” for the current investing environment. We don’t take those calls or meetings not only because they are a waste of our time, but also because it is hard to imagine an investment that will convince us that is better than our long-term strategic approach.

Still, it is interesting to occasionally review just a sample of those offerings.

A “tactical allocation” fund with only $53 million in assets and expenses of 1.7% explained why it had such a great year in 2020 (up 72%, so its bet paid off) and why the next two years were brutal (down nearly 11% and 26%). The manager believes it’s time to reduce risk and rotate into Treasuries, then back into small stocks. If you want to make that bet, you don’t need this manager to do it.

A fund with $59 million in assets and expenses of 1.2% made a persuasive pitch why their focus on global consumer brands is timely; of course, the pitch came after a strong retail sales report and the one year in which the fund has done particularly well. It also notes that the fund won’t have a capital gain distribution in 2023, but it did have massive distributions in several prior years; capital gains distributions force a tax liability on investors just for owning the fund. Funds with low assets can have strong years because they make big bets, but they also suffer horrible years.

There are already investments that generate three times the daily performance of indexes like the S&P 500, but now comes FOUR TIMES the daily S&P 500 daily return (and it has the catchy symbol of XXXX). The mechanics of these leveraged funds is complicated, but the end result is that the return is less than four times if the investment is held for a long period. The issuer says it is only for sophisticated short-term investors, but it’s out there and naïve investors (and gambling addicts) will certainly jump on it.

An institutional investment platform included nearly every current buzzword imaginable. It is an “easy-to-use digital platform” with a “wide selection of highly vetted private market alternatives” (that is, not available to the public and therefore “special”). It includes investments in “Legal Finance (financing lawsuits), Art Finance, Collateralized Loans, Private Credit and Opportunities in the Sports, Media & Entertainment Sector”. As a final kicker, it has “AI-eligible products”. These are all high-risk, potentially high-return investments, and exiting the investment is difficult, so we prefer to stay slow and steady.

My all-time favorite, though, is a Scottsdale-based hedge fund that was just started in June 2023 by two former investment managers from a much larger firm. The fund is three times leveraged (which amplifies returns in both directions) and has the typical hedge fund fee structure of a 1% management fee and 20% of profits. When we expressed no interest, they came back with “what about the fund don’t you like (liquidity, fees, taxation, structure, etc.)?” We gladly replied that is all of the above.

There is a time and place for “risk capital”, that is, money that you can afford to lose, and we have many clients who invest outside our management. However, we manage enough of their investments so that they can sleep at night knowing that their financial future is secure. We are happy to be boring.

Love Ain’t Cheap

It’s a bit late, but with inflation such a focus this past year, here’s a look at one of the most fun inflation measures – the cost of the Twelve Days of Christmas from PNC Bank (the 40th year – banks can sometimes have sense of humor).

Buying all the items in the song once would cost $46,730 this year, up 2.7% from last year (but up less than general inflation). Compare that to the 10.5% increase in 2022. Buying the items repeatedly as they appear in the song would cost nearly $202,000.

The index was at just over $20,000 in 1984 and has fluctuated in the ensuing years. In 1995 it was actually down 26.3% to a collective cost of just under $18,000; the price of swans fell by 50% that year, reportedly due to a successful swan breeder program.

Despite gold hitting an all-time high and increasing in price by over 13% for 2023, the price of the five gold rings was flat for the first time in five years. (Interestingly, the index used prices from jewelers; the online cost of the gold rings went up 35%. Similarly, the price of the full index purchased online was up 4.8% compared to the 2.7% for direct purchases.) Other items that did not increase in price include the four calling birds, the seven swans a-swimming, the eight maids a-milking and the nine ladies dancing. The swans are still pricey at $13,125.

Wage increases accounted for several price hikes in 2023, such as 6.2% for the 11 pipers and the 12 drummers drumming and 4% for the 10 lords a-leaping, but the maids a-milking were flat because their cost is based on the minimum wage. Labor even contributed to the 3.5% increase in French hens, although the hens are still the least expensive of all the birds. By comparison, turtle doves were up 25%. And housing costs hit the index, just as for all of us, as the “housing” for the partridge (the pear tree) was up 15%.

Of course, cost would probably not be a deterrent if someone was intent on living the Twelve Days of Christmas. Love is not only blind but it also has no budget.