2023 Highlighted the Need for Diversification

Five Things You Should Know

1. Equity Markets – moved higher this week with U.S. stocks (S&P 500) up 0.95% and international stocks (EAFE) rising 1.51% 
2. Fixed Income Markets – slightly rose this week with investment grade bonds (AGG) up 0.07% and high yield bonds (JNK) up 0.75% 
3. China Stimulus – In an ongoing effort to restore their struggling economy the Chinese central bank unveiled new measures this week, including a bigger-than-expected cut to the bank reserve requirement ratio. These measures are expected to mobilize over $300 billion, with plans to create a stabilization fund that will buy stock shares onshore through the Hong Kong Exchange.
4. Strong GDP – The final quarter of 2023 ended on a high note with Q4 GDP growth coming in at an annualized +3.3%. A combination of resilient consumers and government spending saw the U.S. economy grow by 2.5% in 2023, significantly better than consensus expectations of flat-to-muted growth going into the year.
5. Key Insight – [VIDEO & ARTICLE] This week, Jake walks us through the 2023 market performance and gives an overview of the 2024 market forecast.

2023 Highlighted the need for diversification

This week we hosted a Lunch and Learn, as we frequently do, covering what happened from a market perspective in 2023 and what we might be in store for in 2024.  As I put together my presentation over the last week and really dug in the “data” a key takeaway continued to pop up.  Although Large Cap US stocks led the charge last year, I’m not ready to forgo the rest of the market.

DIVERSIFICATION

As you can see from the chart below provided to us from Goldman Sachs, 2023 was the year that US Large Cap companies led the charge from a performance standpoint.  Driven upward by the coined “Magnificent Seven”, Apple, Amazon, Alphabet(Google), Meta, Microsoft, Nvidia and Telsa soared.  These mega cap stocks rebounded nicely from what was an abysmal 2022 which saw many of these same companies lose 50% or more of their market cap.  This US Large Cap rally has led to many conversations recently with people wondering, “why wouldn’t we go all in on large US company and more specifically, technology stocks?”  To this I say, let’s look at the data.

Highlighted in the chart below it is clear to see that even through Us Large Cap stock had a great year in 2023 compared to most other asset classes that make up a diversified portfolio, this is not what we historically see.  Over the past 10 years it has been shown that although having an overweight to US stocks compared to International and Large Cap stocks as an overweight compared to Small and Midcap stocks can have positive effects on returns; that does not mean we should neglect diversification.

Goldman Sach’s November 30^th 2023

Using a well throughout mix of equity, fixed income and alternative asset classes provides not only stability through full market cycles, but also the opportunity to avoid getting overly exposed to risk during volatile markets.  Avoiding risk during challenging markets and having the ability to “sell high” and “buy low” because your diversified portfolio is not all looking and acting in the same manner can and should lead to better long term performance through full market cycles.

In conclusion, years like 2023 can we tough.  Watching a handful of stocks outpace everything else in the market can create feelings of “missing out” and wanting to chase performance when one asset class is running strong.  These are the times when looking at the historic data, attempting to “keep in check” the emotions that sometimes creep in and staying the course help avoid mistakes and keeps portfolios, and financial plans on the right course.

I hope everyone has a wonderful weekend.

Jake and the team at TEN Capital.

Data, Just the Data

U.S. Jobless Claims – rose by 25,000 to 214,000 on the week ending January 20th. This was a significant rebound from the 16-month low from the previous week and exceeded market expectations of 200,000.

U.S. Durable Goods Orders – in the United States remained unchanged in December 2023, after a 5.5 percent rise seen in November. This landed below market expectations of a 1.1 percent increase.

U.S. New Home Sales – increased 8% from the previous month to a seasonally adjusted annualized rate of 664,000 in December of 2023. Rebounding from a downwardly revised 9% drop in November, December’s data came in higher than forecasts of 645,000.

U.K. Composite PMI – increased to 52.5 in January 2024. This was up from 52.1 in the previous month and slightly above the market consensus of 52.2, indicated by a preliminary estimate.

The European Central Bank – kept interest rates unchanged at record-high levels during its first meeting of 2024 and pledged to keep them at sufficiently restrictive levels for as long as necessary to bring inflation back to its 2% target.