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Time Is On Your Side

Quarterly Newsletter

By Dr. Robert Votruba

Though it’s difficult to measure, 2023 may be remembered as one of the worst years ever for economists and market forecasters.  As the clock struck midnight on New Year’s Eve this past year, even the oft maligned weather forecaster looked like a seer when compared to the most followed financial prognosticators.  Forbes labeled 2023 as “The Year of Terrible Market Predictions” with Business Insider echoing that sentiment in an article titled “Stock Market Gurus Predicted a Grim 2023.  They were Dead Wrong.”  The old joke about economists predicting nine of the last five recessions certainly rang true last year.

To be fair, things did look bleak for markets and the economy 12 months ago.  At the close of 2022, the Federal Reserve Board (The Fed) was engaged in a heated battle against inflation, which was coming off 40 year highs.  In response, the Fed lifted rates 11 times, from near zero to over 5%.   Most believed that the aggressiveness of this campaign was sure to spark an economic downturn.  At the end of 2022, 70% of economists polled by Bloomberg expected a recession in 2023.  Some even felt that a mild recession was necessary, if not welcome, to stamp out inflation.  The prediction seemed safe.  Higher interest rates mean higher borrowing costs, which translate into less spending.   The Fed’s aspiration of a “soft landing” (stamping out inflation while avoiding a recession) appeared nearly implausible less than a year ago.

Yet, in the face of dire predictions, a regional banking crisis resulting in three of the five largest bank failures in U.S. history, and a war in the Middle East, nearly all major financial asset classes climbed in 2023.   Bonds bounced back from their historic losses in 2022 while stocks closed the year near record highs.  Even the most sophisticated financial models, likely aided by artificial intelligence and run by the brightest minds, didn’t anticipate the following developments in 2023:

  1. Inflation continued to decline after peaking in June 2022, moving steadily toward the Fed's 2% target.
  2. The job market remained resilient, with unemployment rates near 50-year lows, and wage growth, although slowing, still outpaced inflation.
  3. Consumer spending, a driving force for over two-thirds of the economy, remained remarkably robust since the pandemic.
  4. Higher interest rates did not inflict significant harm, as a substantial amount of debt carried by individuals and corporations was locked in at historically low rates for years to come.
  5. Housing prices held firm, as homeowners with low-rate mortgages were hesitant to sell, resulting in a shortage of homes for sale and supporting record-high house prices according to the national S&P/Case-Shiller Index.


Surrounded by these signs of strength, the recession that keeps on not happening has begun to fade in the distance.   In a stunning turn, the once unfathomable soft landing has become the “base case” for 2024.  Of course, the suddenly optimistic economists could be wrong again.   Maybe we do encounter the long awaited pull back in the U.S. economy.  After all, we still have an inverted yield curve which is a condition where short term rates are higher than long term rates and has preceded every recession in the past 50 years (though this is still not a fool-proof indicator).  

While the correlation between financial markets and the economy is debatable (perhaps you’ve heard the phrase “the market is not the economy”) we are still left to wonder why long-term investors pay so much attention to short term economic forecasts.   Consider the following graphic which outlines that even someone with a fully operational crystal ball only matched the return of a buy-and-hold investor.  

Although most assets rose in 2023, a closer examination reveals nuances.  While the S&P 500 had its best year since 2021, the lion’s share of the gains came from only a handful of stocks, namely the so-called “Magnificent Seven” (Apple, Microsoft, Alphabet/Google, Nvidia, Amazon, Meta/Facebook and Tesla).  And bonds were in negative territory at one point until a historic late year rally was sparked by the Fed indicating that they are mostly satisfied with the progress being made in the fight against inflation, and, as a result, are likely done raising interest rates for this cycle.  The Fed even forecasts a few rate cuts in 2024.

J.P. Morgan has labeled 2024 as “The Last Leg on the Long Road to Normal”.  Though the pandemic’s economic impact has faded, its influence has lasted much longer than most anticipated.  While high in comparison to the past several years - remember interest rates have been suppressed since the Great Recession in 2008 – rates are now in line with historical averages.  The past 15 years were simply not normal for interest rates.  Following is a look at rates over the past 150+ years.  Aside from the Great Depression, the double-digit inflation period of the 1980’s, and the period we just witnessed, rates have generally been in the 3% - 6% range for the 10-year treasury bond.  Today, we’re at 4% - squarely in “normal” territory.

Getting back to normal wasn’t easy of course, even if 2022 becomes more of a distant memory.  Recall, 2022 was a terrible year for stocks and the worst year ever for bonds.   But now that rates are no longer near zero (zero being an unnatural state by any measure) we can hold more confidence in markets for two reasons.  One, financial markets – both stocks and bonds – have responded well when Fed hikes have ended.  In looking at the past four interest rate cycles (from 1995 – 2018) we see that both stocks and bonds have outperformed cash after both one year and five years following the final Fed hike (which recently may have occurred in July 2023). Two, if the economy does fall into recession, and it certainly will at some point since that is a natural part of the business cycle, the Fed has regained the tools to combat it.  The Fed’s primary weapon for fighting recessions is to lower interest rates.  It’s not perfect but generally has been very effective.  Well, if rates were still at zero the Fed wouldn’t be able to lower rates.  Its most powerful tool would be rendered useless.   That’s not the case today.  With interest rates back in normal territory, the Fed has plenty of weaponry.  Simply put, the underpinnings of financial markets and the economy are in a much better spot today then they have been for several years.

While market volatility has mostly declined throughout 2023, we would not be surprised with an uptick as the presidential election nears in 2024, even though we know that historically the political party that wins the White House has little impact on market returns.  In the 23 election years since the S&P 500 began, the market has been positive 83% of the time.  Long term results paint the same picture.  Since 1936, the annualized 10-year return of U.S. stocks made at the start of an election year when a Republican won was 10.5% compared with 11.2% when a Democrat prevailed.  So, while things are sure to heat up as the election cycle deepens, this too shall pass.

Inflation is moderating.  Interest rates have leveled off.  The job market appears strong.  Even two wars haven’t dented investor enthusiasm over the past few months.   Yet, despite these positive signs, the safest bet one can make for 2024 is that at one point the market – stocks and likely bonds – will be down.  That’s right, you’re likely to see negative returns at one point this year.  This prediction is unsurprising, considering that, since 1980, markets have seen declines at some point every year. Yet, despite average intra year declines of 14.2% over the past 44 years, the stock market rebounded and ended the year showing gains nearly 75% of the time.  Looking at bonds over the same time frame reveals even higher probabilities of positive returns, showing gains in 43 of the past 48 years.  So, the next time you see red flashing on a daily market summary, take comfort in knowing that time is on your side.


Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. National Financial Network is not an affiliate or subsidiary of PAS or

Guardian. CA Insurance License Number - 0D23495. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. S&P 500 Index is a market index generally considered representative of the stock market as a whole.

2024-167169 Exp 01/26