January 2024
Due to the recent moderation in the inflation rate, markets responded positively, and the Fed announced they will cut interest rates in 2024. Meghan reminds listeners that just because the inflation rate has moderated, prices won’t necessarily come down- they will just increase at a slower pace. Meghan and Chris also discuss how bonds’ performance rebounded in 2023 after a poor 2022, as well as gold. They agree that gold is a store of value in a portfolio, serving as a hedge against inflation.
Going into 2024, the upcoming election, political division and a potential recession or economic downturn may leave investors feeling uncertain about what is to come. Meghan and Chris emphasize the importance of a diversified and resilient investment strategy in times like this.
Watch previous episodes here:
Ep. 65 Bond Alternatives: A Smarter Way to Lend to Corporate America
Ep. 64 Artificial Intelligence: Possibilities & Pitfalls
Hello, everybody. And thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Chief Investment officer Meghan Pinchuk. Meghan, thank you for joining us.
Thank you for having me.
We're wrapping up 2023. We've got a couple days left, but by the time this airs, it will be 2024 New Year.
If you were to kind of look back on the year, what are your biggest thoughts? I'm extremely surprised by how things turned out. Coming off of just a horrible year in the stock and bond markets in 2020 to dealing with inflation, some some bank failures.
And now you fast forward. Wow. It's a pretty interesting end of the year.
There was very good performance to your point, despite all of that, and I think 2022 is very much marked by rising inflation. It's something that people hadn't seen in decades. So that was scary. And then also rising interest rates and both of those things reversed themselves to some degree or at least moderated in 2023. And so to a large degree, I think that is why markets reacted so positively, was that they were really scared it was going to get worse.
And instead of that, it got a little better. So instead, what you had was stocks up. The S&P 500 looks like it's on track to be up mid twenties for the year, which is a very strong year. I will say that is a bit misleading. As you've got seven stocks. We have the new...
The Magnificent Seven.
We've got to name everything in our industry. So the Magnificent Seven is some of the biggest tech companies that really drove that to a very large degree. That grouping up around 70% for the year. Yeah. So that that is a big driver and that hit that certain industries did a lot more poorly or were a lot weaker over the year in stocks.
But overall, obviously a very strong return for the market.
It's always fun talking, you know, my parents or grandparents around inflation or interest rates because last year we were worried about inflation and rising interest rates. And I think we were just spoiled because when I was talking with my grandmother is 89 and, you know, mortgage rates are at six and a half seven. She said, she basically laughed at and said, That's just silly.
You guys are spoiled with three or 4% interest rates.
I will say that it doesn't feel when you talk to the average consumer, it doesn't feel like inflation's moderated. That's something we get from people. They say, Well, why it's going down? Why? Why are prices still so high? And so I think that's an important point that most people might not realize, is that just because inflation is lower doesn't mean prices went back down like 2020 to set a new floor in prices.
Essentially, it would take a depression for it to go back down. So you actually don't really want it to cool down. But from here, prices are still going up. They're just going up at a slower pace than they were previously. Despite that, the Wall Street, when they're looking, that's what Wall Street cares about. That's what the Fed cares about.
That's what everyone's watching to see. You know, how are they going to react with interest rates? And so I think a big reason we saw such a strong rally toward the end of the year here, too, in stocks was that Jerome Powell from the Fed came out and said that, you know, declared victory to a large degree being they have won against inflation.
And so because of that, they're expecting to actually cut interest rates in 2024.
And then the market responds like, okay, great, everything's awesome. Stocks ended up having a tremendous quarter. Bonds rebounding significantly for the year.
Yeah, bonds were actually on track. So Bonds had their worst year ever in 2022, down 13%. And then they were on track to do poorly again this year. They were actually down a percent for the first three quarters of the year. But as interest rates came down in this fourth quarter, they rallied tremendously relative to bonds. So they're up about 5% as of right now.
Yeah, And then gold actually rebounded quite a bit the second half of the year as well, at or near all time highs. Yes. Normally not an environment where gold does well during higher inflation period.
It's so tough. Gold has so many different factors theoretically that can influence it. But in higher interest rates are usually negative for gold, mostly because you think of golden gold doesn't produce income well. So if the competition out there is to go invest in bonds right now, short term treasuries that are yielding you five, five and a half percent, that's bad for gold in theory.
People say, well, I don't I don't want to lose out on that, so I'll sell my gold, I'll go buy Treasuries, because I think the fact that people didn't buy gold and still increase in value and is to your point at at or near all time highs, I think that's largely indicative of concerns about uncertainty out there, concerns that maybe inflation isn't completely done or finished at this point.
And so you see a lot of central banks as well as other individuals buying better for having that a little bit more part.
Of their portfolio. Yeah, I mean the gold from a resilient standpoint, I think your Jeff, in one of your quarterly webinars over the years, it said something like 100 years ago, an ounce of gold could buy a really nice Italian suit. You fast forward to today one ounce of gold, you know, $2,060 an ounce. It's going to buy a really nice Italian suit still today, too.
To a large degree, the way we think of it is it is a store of value in the portfolio. So the idea being that as inflation goes up, as we print more dollars or other currencies all around the globe, is gold something that can hold its value? And I think it has over many, many years. So that's why we have in the portfolio.
And when you think about it, our clients, our clients have or really all individual investors have the vast majority of their money in their local currencies. So here in the United States, all your money is in dollars, right? And so to have a piece of the portfolio as a hedge against that or something that's a little different in this different currency, that could do well over the long term, you know, if inflation does stay high or even anywhere above where it's been recently, I think it makes a lot of sense.
I do, too. Not that we're into making predictions here because if you rewind 12 months, no one predicted the outcome that we're in today with, you know, stocks having a good rebound, bonds being up positive for the year after having a really ugly year. And, you know, this is following bank failures in, you know, crisis with Ukraine and Russia and then the atrocities that are going on over with Israel and and Hamas.
I mean, there are so many headlines that could prevent, you know, the markets from turning out the way that they did. It's now 20, 24 report. As the chief investment officer, how are you feeling about things and what are you looking at? You know, going forward, you talk a lot about resiliency and being able to withstand a number of different outcomes, but what are your thoughts on 2024?
I think that got to your point. No one really predicted 2023. And so we we tend not to spend huge amounts of time trying to predict exactly what we think is going to happen in markets. And so Wall Street tends to be very bullish or optimistic on average if you go back. And so even coming into 23, I think there was a lot of concern, negativity.
And again, you're coming off a period of challenge with inflation and interest rates, but there was a lot of concern. So I don't think any of the pundits predicted we'd be up 26%. You know, the S&P 500 for this year. So it gives you a little sense of now coming eight and 24 when everyone's coming out with their very strong, you know, conviction about about what's going to happen.
And it gives you a little sense of how valuable that is. And and so I think when we when we focus on it, we do think about all the uncertainty out there. So stocks are, in our opinion, on a little bit of an overvalued side. That doesn't mean they can't keep going up or become more overvalued. But the flip side is there is a lot of uncertainty.
So you named a bunch of it in terms of geopolitical unrest and all the problems we have in the world, tensions with China at home. We are the most divided we've ever been politically. And so there's there's a lot of nastiness on that front. We are coming into an election year, which is not going to be that fun.
But all of this is the backdrop. It's really tough to look at stocks and say, great, based on earnings estimates, this is what it's going to grow and this is what we think it's going to do. And so instead of spending time and energy on that, we really do focus just on trying to create broader resiliency in the portfolio.
So, Jeff, Jeff Sarti, our CEO, came out with his perspective newsletter on resilience or on the uncertainty recently and the idea that sports suggest with predicting, right, Because uncertainty is scary and you don't know what's it what's it going to do, what's it going to mean? And especially scary when you think about how it affects your nest egg.
You know, your life. So instead of trying to become out and say, okay, what's going to happen? And if they can apply that prediction to their portfolio and say, great, now I feel good, I know what's going to happen, it's all going to be fine. Instead of doing that, we just say, look, let's try to build in things that are going to do well in any scenario.
So we have some stocks, we have some bonds, and those will be affected by the markets. But we have a lot of other things in the portfolio as anyone who listens to your podcast knows that that I think are going to do well in a lot of different environments. So if markets are flat or down, if if inflation picks up, if inflation stays moderate, they'll do well in a lot of these scenarios.
And so building that in really creates a more is a more resilient portfolio that can handle a lot of these sort of things.
Yeah. I mean, look, 2024 is likely to have a number of surprises is that we can't even think of yet. I mean just look at 2023. In 2022, that's not even including the fact that we're going into an election year. Lots of debt, you know, as an economy, as a globe and recession, you know. Right. If there's all this talk about recent recessions and, you know, recessions can be somewhat healthy, I mean, it doesn't have to be a 28, 29 global financial crisis where we were worried about potentially even having a bank one day.
Yeah, look, again, recessions aren't fun. So, you know, unemployment going up and all the things that happened. So I understand why it's not desirable. The flipside is, as you say, it is it is healthy. It is healthy to clear out the companies. Maybe that shouldn't be around instead of propping them up with easy money and things like that.
I started in this industry full time. I was actually intern at Wharton Wharton Capital back in the day, and then I started full time after school in 2006 and all the talk back then was about soft landings like this idea of the economy, you know, wouldn't actually have a recession. It would just kind of it would just kind of like gently slow and then things would take off again and be okay.
And so obviously that didn't quite occur to you. That was it. It happened. And I was like, is this is this is this.
Yeah. Boy, I signed up for a great job.
To your point, they promised it wasn't always like that, right? Well, like is remains to be seen. The flip side is now in terms of recession, now the top is like no landing. So I went from a hard landing, soft landing to what if we just had no I mean, what if what if the fun just continues forever?
And I don't I'm not sure why that is desirable necessarily. The idea that let's just avoid this at all costs. I think a mild recession would actually be fairly healthy for the economy and for markets ultimately. And so I don't think that's something we're scared of. The flipside is, again, can you build in resiliency? Can you build in things that are going to do well in that environment as well as if the good times continue?
Yeah, it makes me feel better sleeping at night knowing that we're making decisions to be resilient during good and bad times, especially around the uncertainty that's out there having zero interest rate policies for as long as we have, it's bound to create some challenges, some headwinds and some problems. The likes of which we still have not seen and it's still uncertain.
So, yeah, thank you so much for joining us, Megan. Cheers to hopefully an uneventful but fun and consistent 2024.
Uneventful. I wouldn't bet on that one. But cheers in 2024.
