2023 Market Comments

“People chronically mis-appraise the limits of their own knowledge. That’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.”
- Charles Munger (1924-2023), Former Vice-Chairman of Berkshire Hathaway

We felt strongly to give a shout out to one of the greatest investors of our time in Mr. Charlie Munger. Rest in peace, Charlie.

It is both simple and genuinely compelling to be able to summarize the behavior of the equity markets, not only in the calendar year just ended but over the last two years. We can in fact do it in points:

• In 2022, the Dow, the S&P 500 and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25% and 35%, respectively
• A week before Christmas 2023, all three were in new high ground on a total return basis (that is, including dividends).

Why stocks did this is irrelevant to the wonderful lessons to be drawn from this experience. What happened? Many things including the pundits were wrong. There are almost as many theories and explanations of why as there are market commentators, of whom we are happily not one. (We would point out, however, that the number of said commentators who successfully forecast both the market action of 2022 and that of 2023 is, to our knowledge, plus or minus zero.)

What should matter most to us long-term, goal-focused, plan-driven equity investors is not why this happened but that it happened. Specifically, that there could be a pervasive and very significant bear market over most of one year, and that those declines could be entirely erased in the following year. Although not nearly as quick or as perfectly symmetrical as the 2022-23 experience, in the largest sense that's how it works.

As always, then, we break our year-end letter into two parts: first the timeless and enduring principles reinforced by these two years, and then a consideration of current conditions.

General Principles

• The economy cannot be consistently forecast, nor the market consistently timed. Thus, we believe that the highest-probability method of capturing equities' long-term return is simply to remain invested all the time.
• We are long-term owners of businesses, as opposed to speculators on the near-term trend of stock prices.
• Declines in the mainstream equity market, though frequent and sometimes quite significant, have always been surmounted, as America's most consistently successful companies ceaselessly innovate.
• Long-term investment success most reliably depends on making a plan and acting continuously on that plan.
• An investment policy based on anticipating (or reacting to) current economic, financial, or political events/trends most often fails in the long run.

Current Commentary

• We remain convinced that the long-term disruptions and distortions resulting from the COVID pandemic are still working themselves out in the economy, the markets and society itself, in ways that can't be predicted, much less rendered into coherent investment policy.
• The central financial event in response to COVID was a 40% explosion in the M2 money supply by the Federal Reserve. It predictably ignited a firestorm of inflation.
• To stamp out that inflation, the Fed then implemented the sharpest, fastest interest rate spike in its 110-year history. Both debt and equity markets cratered in response. It is easier to forget that we also experienced three regional bank failures.
• The dramatic interest rate movements in 2022, which led to unusually steep losses in bond portfolios, thankfully didn't carry over to 2023. Yields on 10-year Treasury bonds rose from 3.87% to 5.0% during the year and dropped back down to 3.9%.
• Despite this, economic activity just about everywhere but in the housing sector has remained relatively robust; employment activity has, at least so far, been largely unaffected.
• Inflation has come down significantly, though not yet close to the Fed's 2% target. But prices for most goods and nearly all services remain elevated, straining middle-class budgets.
• Capital markets have recovered significantly, as speculation now centers on when and how much the Fed may lower interest rates in 2024, and whether a recession may yet begin, whatever they do. These outcomes are unknowable—probably even to the Fed itself—and don't lend themselves to forming a rational long-term investment policy.
  • Seven stocks – Apple, Microsoft, Nvidia, Alphabet, Meta (Facebook), and Tesla accounted for 65% of the return of the S&P 500 which was up 24.2% in 2023. These stocks now make up 28% of the weighting of the S&P 500. (per VettaFi Advisor Perspectives on 12/18/23)
• Significant uncertainties abound. Trends in the U.S. federal deficit and the national debt continue to appear unsustainable. Social Security and Medicare appear to be on paths to eventual insolvency unless reformed. The serial debt ceiling crisis continues, and a bitterly partisan presidential election looms. The markets will face significant challenges in the year just beginning—as indeed they do every year.

Our overall recommendations to you are essentially what they were two years ago at this time, and what they've always been. We will continue to revisit your most important long-term financial goals. If we find that those goals haven't changed, we will recommend staying with our current plan. And if our plan isn't changing, there'll most probably be no compelling reason to materially alter your portfolio.

As always, we welcome your questions and comments and look forward to talking with you soon. Thank you again for the opportunity to serve you and your family.

Thank you for the introduction of your friends and family that so many of you have made. As a service to our clients, we are happy to act as a sounding board for your friends and family. If any of them need a second opinion on their financial situation, introduce them to www.striblingwhalen.com or call us at 678-989-0048.

Regards,

620 Spring Street, SE
Gainesville, GA 30501
678-989-0048
www.striblingwhalen.com

Any opinions are those of Stribling~Whalen Financial Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.

Investment advisory services through Raymond James Financial Services, Inc. Stribling~Whalen Financial Group is not a registered broker/dealer and is independent of Raymond James Financial Services.

Sources:

• S&P index data: https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
• https://www.marketwatch.com/investing/index/spx
• Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
• https://www.advisorperspectives.com/articles/2023/12/18/equity-market-ai-revolution

The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected, including asset allocation and diversification. Past performance is not a guarantee of future results.