2023 in Review - Let's talk about your feelings

“For reasons I have never understood, people like to hear that the world is going to hell" - Deirdre McCloskey

"Vibecession - a period of temporary vibe decline where economic data such as trade and industrial activity are relatively okayish" - Kyla Scanlon

"Pessimists sound smart. Optimists make money" - Nat Friedmand

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Let's talk about your feelings.

2023 was a year of geopolitical unrest, economic angst, political hijinks, and ups and downs in the market.

That is to say, it was like every other year.

We're tempted by recency bias (and narcissism) to conclude that events happening now matter more...the gravity of this situation is heavier than any before. Look at what my generation is dealing with compared to others!

This tendency leads us to make emotional decisions with our investments, over and over...we simply can't stop from thinking right now is the scariest part.

And yet, the market goes up...

The quote above is from the brilliant Kyla Scanlon, who felt it so hard in 2023 she coined a new word for it!

War

During a client conversation the other day about current events, I was struck by the similarity of the conversation to one 10 years ago.

This older woman had called me back then to cash out her investments. She simply couldn't take it anymore, watching the news each day and hearing all the horrible things going on around the world. She just wanted to be safe in cash.

Her two reasons? Putin and the Middle East.

I don't have to tell you that Putin has been stirring up trouble for a long time, or that the Middle East has been a constant tinderbox.

10 years have passed since that phone call and those are still the headlines.

On any given day of any given year, humans are at war. Humans are doing terrible things to each other. People are dying, people are suffering, and there are nasty, evil people in the world.

I don't want to make light of awful things, it sucks, right? But it's true. There's no time in history when it wasn't true.

This can be an excuse to hide...or it can be an accepted fact of life.

And yet, the market goes up...

Here's a chart of the last ten years, approximately when that poor woman put all her money under the mattress. +209% return

Certain Doom

The problem with investing is you don't get extra credit for worrying more. Your dollars won't grow faster if you have the craziest conspiracy theory among your friends.

Humans are hardwired to be seduced by pessimism. Our ancestors survived and advanced by knowing a tiger could be around any corner ready for a bedtime snack. Caution meant you survived till morning. Daniel Kahneman won a Nobel Prize by identifying people respond more strongly to loss than gain, saying 'organisms that respond to threats as more urgent than opportunities have a better chance to survive and reproduce.'

The investing world is full of charlatans proclaiming this time the crash is imminent... now if you'll just buy their book...

Robert Kiyosaki is the author of the 1997 book "Rich Dad, Poor Dad." It was a foundational work on building healthy financial habits and was influential for me. For whatever reason, Kiyosaki has become the online version of the guy shouting on the street corner.

Here's a wonderful timeline showing his predictions against the S&P 500. This is passed around and updated somewhat regularly by some in financial social media circles, always good for a laugh:

But what about that guy on that one commercial that says I should sell my stocks and buy gold instead?

Yikes:

One of my personal favorites is Harry Dent, who once again just re-upped his 'crash of a lifetime is coming' prediction...of course just moving the date into 2024.

Here's a chart from Harry... This looks like something you'd create if you were writing a comedy skit with a soothsayer character who lost his mind. If any of you can tell me what the hell is going on here, I'm all ears:

"All cycles converge in 2017" 🤡🤡🤡

These people are on TV and writing articles every day with one goal: scaring the crap out of you so they can make money from it.

And yet, the market goes up...

Ok fine, you say, so maybe everything's not terrible... but what is going well? I'm glad you asked:

Inflation

2022 was an ugly year for nearly all assets. Inflation was the highest we've seen in a generation, and the expectation was we would enter 2023 with high inflation as a normal part of our lives.

Then a sneaky thing happened...the Fed did its job. Yes, they did blow some things up, but it was somewhat expected with raising rates as quickly as they did:

When the Fed met in September they decided to pause their rate hike campaign. Why? Because it worked...

So if inflation dropped that steeply...why doesn't it feel better?

Well first, you can't feel percentage points. People feel inflation when they buy stuff, higher prices are a direct hit.

The Fed has long used 2% as its inflation target, which means prices are always going up, but typically in amounts that aren't shocking. High inflation like in 2022 means prices change quickly enough that we feel it, at the grocery store, the gas station, etc. It's noticeable.

So while the Fed clearly did its job and slowed inflation (disinflation) back to acceptable levels, which is very healthy and positive for the economy, those high prices didn't necessarily decrease (deflation).

It's good... it just doesn't feel good.

The Economy

In December 2022 the Financial Times published this survey, showing 85% of economists forecasting a recession in 2023:

Coming off a year of high inflation and bad markets, the economy had to be the other shoe that dropped...right?!

As Bob Seawright says in his hilarious annual forecasting review:

"As ever, nobody knows anything"

Instead, the economy kept chugging along as if the inflation thing had never happened. Unemployment stayed historically low:

GDP growth bounced off its late 2022 low and steadily rose, never dipping into negative territory:

How did we have the worst inflation in a generation yet the economy remained rock solid?

It may have been due to the feeling a recession was coming, so people pulled back on spending and hoarded cash:

It's possible China ending its COVID lockdown was just the boost the economy needed coming into 2023.

House prices, a large source of feeling wealthy, were resilient in the face of higher rates.

We avoided a debt ceiling government shutdown.

Maybe it was the Swifties.

Economic variables are endless, it's nearly impossible to pinpoint the reasons why...but the result is a solid economy somehow still in growth mode.

The Magnificent 7

The S&P 500 rose 24.2% in 2023, a remarkable turnaround from 2022, and a shocking result given the feelings from everything above. Most assets did a clean about-face from 2022:

If you followed the US market you may have noticed that it didn't feel like the market had a big year?

The Magnificent 7 is the nickname given to the 7 most influential companies, market and probably otherwise. Can you guess the 7?

They dominate all of our lives, and in 2023 they pulled the market along for a ride:

These names won't come as a surprise, but what was surprising was the relatively bad performance of the market outside of them:

'Equal weight' is the market lingo used to say a portfolio where every stock (in this case the 500 stocks of the S&P) is owned in the same percentage (assume 500 stocks at 0.2% each).

The equal-weight S&P did nothing in 2023! While the S&P 50 (50 largest stocks) gained 25.81%, thanks to the huge moves of the Mag 7.

What if we split it even further, and measured just the Mag 7 against ALL the other stocks?

Is it a good thing that our market was propped up by only a few companies? Well...that's a interesting debate.

And yet, the market goes up.

If you're saying, 'well it's obvious, those companies are everywhere, I should just own them and sell everything else' - let me remind you how unhappy you would have been in 2022 with the 'Mag 7:'

The market is really good at making the most people feel the most dumb (not to be confused with Dumb Money, that's another debate). Just when you think you've got it all figured out, you have a complete reversal from year to year like 2022-2023.

What can we do?

Well as Nick Maggulli says, you should Just Keep Buying, trying to time the market never works.

But buy what? If you didn't own the Mag 7 in 2023, now you look stupid. A reminder:

Each year returns are led by different assets. If you're looking for a pattern there, good luck. The only way to know you'll have exposure to the highest returns is to own ALL of it, and the trade-off means owning the worst returns too.

"Diversification means always having to say you're sorry" - Brian Portnoy

Good Stuff!

Ok, so maybe things aren't that bad?

If you're still feeling down, and you've read this far, here's your reward: a list of pretty damn cool things going on right now.

See you out there!

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- US flight cancellations were the lowest in a decade

- America still produces more oil and gas than anyone

- Science gave us weight-loss drugs that not only work, they may work so well they change our healthcare system

- Nuclear fusion, the holy grail of clean energy, is nearing reality

- After 20 years (!!!) of negotiation, 200 countries signed a treaty to protect the oceans

- Artificial intelligence exploded onto the scene with all sorts of applications

- The first Alzheimer's drug received FDA approval

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