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The Cornerstone Investment Commentary: Year-End 2023

Throughout 2023, Cornerstone counseled that as inflation declined, so too would interest rate pressures, and that nothing else really mattered to create an environment for stock and bond market recoveries.  This is exactly what happened, and we saw most client portfolios gain back at least 98% of their 2022 losses.

Specifically, US large-cap stocks led the way, with international equities not far behind.  It was gratifying to see our preferred mix of US large-cap stock holdings noticeably outperform the S&P500 index.  By late October, lingering fears of further Federal Reserve interest rate increases had vanished.  Not unexpectedly, this fueled a strong rally in small-cap stocks and provided a chance to eliminate real estate (REIT) holdings on favorable terms.  It also caused intermediate-term bonds to outgain short-term bonds – and pull ahead for the year as a whole – during the fourth quarter, a trend we would expect to continue in 2024 now that interest rate cuts are clearly on the horizon.

Not all advisory firms can write what you just read.  A year ago, the ‘consensus Wall Street view’ was three-fold:  Sell US stocks.  Buy US bonds.  Buy Chinese stocks.  Those who followed it missed out significantly.  As you know, we did not.  A review of investment results from dozens of large US financial institutions makes us even more pleased about the level of gains you experienced in 2023.

Pausing to look at a few bits of year-end data, the following items seem worth pointing out:

  • The worst performers in 2022 were the best in 2023. Patience – and diversification – pays off.
  • Even with 2022’s decline, the five-year annual return of your portfolio’s equities is over 12%. It’s always wise to look at a single bad year in a somewhat longer-term context.
  • Most commodities continued their declines which began in the Spring of 2022.
  • Based on the fourth quarter, inflation – overall and ‘core’ – is running at a 3% annual rate.
  • Longer-term interest rates, including mortgage rates, are at virtually the same level as one year ago.

Looking ahead, further gains in equity markets will be more difficult with so much recovery now achieved in large US stocks.  As the expected rate cuts by the Fed approach, it will likely mean more opportunities for intermediate-term bonds, US small-cap stocks and – if the dollar falls further – foreign stocks.

We will consider all this during any rebalancing your portfolio may need after such strong year-end gains.  And while the 2024 election could generate higher volatility, we expect that those who try to ‘time’ markets based on their prognostications will again find the outcome to be both costly and frustrating.  It probably goes without saying that we will be watching how markets react to the various events unfolding this year.

With wishes for a good and healthy 2024, we thank you for the continuing opportunity to work together.