2023: The Year That Was Not

“Nothing is impossible. The word itself says ‘I’m possible!'” - Audrey Hepburn

Asset class returns

The Year That Was Not

2023 proved to be another year when the consensus views were not correct. A few of these views that turned out non prescient were that inflation would remain elevated in mid-single digits or higher, higher interest rates would crush housing prices, consumer spending would collapse, and oil prices would continue to rise. In the next few weeks, a consensus on topics such as earnings growth, inflation expectations, and other key financial market factors will inevitably come out. Since we are not in the prediction business, we will listen to the punditry but with a healthy dose of skepticism.

What Went Right?

Bonds avoided a fate that they have never seen before: three calendar years of negative returns for the Bloomberg U.S. Aggregate Index (Agg). Domestic and International Equities returned significant positive returns. Alternatives continued to deliver, with positive contribution from hedged equity, market neutral and real estate securities, and negative contribution from commodities.

What Could Go Wrong?

Here’s the rub. When everything is moving up in lockstep, correlations become tight, and markets can retreat just the same. We don’t think that this will necessarily happen in 2024 because of the backdrop for fixed income. Maybe markets are a bit over their skis with the snap recovery of the bond market in the final months of 2023, but the coupon payments could offset market expectations the rate hikes might come fast and furious. Equities are in more perilous territory as valuations have quickly gotten rich. Earnings will need to deliver to maintain these high share prices and rich valuations.