Looking back to 2023, as we entered last year the 25 Wall Street strategists surveyed were all off the mark, with only three predicting S&P returns of more than 14% and more than half of them forecasting returns of less than 8%. However, we also forecasted modest single digit positive returns for 2023. We nonetheless adapted to the Fed’s dovish rate signals expressed later in the year by adding risk to portfolios, particularly in the fourth quarter (Q4). Consequently, client portfolios not only overcame 2022 market losses, but finished the year firmly in the green.
Another significant market return consideration, and rather unaddressed by Wall Street, is the Aggregate Bond Market Index (AGG) has not recovered its -13.0% loss from 2022, as the intermediate bond index finished with a modest +5.65% for the year. This fact has a material impact on the popular traditional 60/40 balanced portfolio. Indeed, the traditional 60/40 portfolio has a 40% bond allocation, which current stands -9% underwater due to double digit loss in bonds back in 2022.
Financial pundits have made much ado about the “Magnificent Seven” stocks and their impact on S&P 500 returns during 2023. This financial conundrum is worthy of analytic revisit given the lopsided risk these stocks could pose in 2024. First, the combined weight of these companies is greater than any combined weight of the top seven companies in the history of the S&P 500. Second, these seven stocks now account for more than one-quarter of the S&P 500 index weighting. This overdependence on such a narrow stock group can be risky, leaving markets vulnerable to a downturn should the fortunes of the Magnificent Seven falter.