At Rise, we take pride in our ability to provide our clients diverse investment options designed to help them achieve their financial goals. Hence, we want to reflect on our portfolio and market performance by highlighting some key developments that shaped 2023 and contributed towards achieving many of these goals.
Market Updates and Economic Developments That Shaped The Year
2023 kicked off with optimism with the recovery of the stock market after it hit bear-market lows in October 2022. However, caution continued to dominate with inflation still at lofty levels and the Fed still actively raising interest rates. For investors, there were widespread concerns that the economy would slide into a recession in 2023. Following that was March’s bank stress, the debt ceiling, government shutdown drama and geopolitical turmoil, and AI/tech stocks rally.
Inflation and interest rates were major headline themes for 2023. In its battle to bring inflation under control, the US Fed resumed its rate hikes from 2022, increasing rates four times in the first half of the year. These series of rate hikes proved effective bringing US inflation down from 6.4% in January to 3.1% in November.
In 2023, the S&P 500 generated an impressive 26.29% total return, rebounding from an 18.11% setback in 2022. This rally was driven by excitement in generative AI and excitement in the use case of AI. Seven companies contributed over 70% of total market return in 2023. For banks, 2023 proved to be one of their worst years. The SVB bank failure of March and subsequent sell-offs in banking stocks caused banking stock to close at 8% vs 27% of the overall market.
In the fixed income market, elated interest rates throughout 2023 drove yields high across the bond market. The benchmark yield crossed 5% in 2023, the first time since July 2007.
2023 was a difficult year for the housing market. It started with a continuation of negative trends from the end of 2022 and turned into the least affordable year for home buying on record. The unusual combination of low supply and high demand caused home prices to remain elevated throughout the year.
Mortgage rates soared high in 2023 as record inflation helped push daily average 30-year fixed rates past 8% for the first time since 2000, pricing many buyers and sellers out of the market. Home buyers didn’t want to pay twice as much for a home than they would have three to four years ago, and home sellers didn’t want to give up their pre-pandemic rates. Higher mortgage rates impacted affordability across the market, straining already sapped budgets.
Reflection On Our Performance
In 2023, our stock portfolio closed the year positive at 22.2%, mirroring the broader positive momentum in the market, providing much-needed returns to our users and balancing out the losses from the 2022 loss. Our real estate portfolio delivered a total of 13.19% 12-month return, and fixed income delivered a 10% return for the year. From the get-go, we had a multiple asset class approach to investing because diversification allows some asset classes to gain when the other falls, giving investors a much better and more consistent overall performance over time than investing in only one asset class.
Our strategy for each asset class is to focus on the highest risk-adjusted returns we can find.
For stocks, our bet on holding onto tech companies like Facebook (Meta) and Google paid off significantly, as they contributed the highest return to our overall portfolio. In an era of high interest rate, defensive stocks are better suited to weather the storm. Our bet on Ulta Beauty Inc. paid off greatly, adding 24.71% to our overall portfolio return. For 2024, we are positioning our portfolio to benefit significantly in sectors we think are ripe for growth, such as the defence industry and cybersecurity sector.
In our fixed-income portfolio, the overall fixed-income market saw relatively high yields with 3-5% stable returns, with the Bloomberg Barclays U.S. Aggregate Bond Index returning 3.6%, and our portfolio delivering 10% for the year. Our portfolio has a good representation of (third-party provided) consumer credit and mortgage-backed fixed-income assets and an increasingly smaller position in emerging market sovereign debt. Despite a tough market position, credit and debt profiles remain relatively stable. Also, with higher interest rates, it’s becoming increasingly possible to move up the risk ladder into even safer fixed-income assets without sacrificing returns, which is great news.
What Should Our Investors Expect in 2024?
Predicting market performance is generally a prediction and nothing more. For 2024, the million dollar question remains, “when will the Federal Reserve begin rate cuts and by how much?”. That is likely to remain the dominant narrative this year, with the focus on how much inflation is slowing. US CPI is retreating from its highs of over 8% in the summer of 2022, closing the year around 3.2% and getting closer to Fed’s 2% target.
Geopolitics is expected to shape market expectations in 2024 with over half of the global population having elections later this year, including the US Presidential election in November. With war raging in Europe, heightened tension in the Taiwan strait, and straining US-China trade relations, in our thesis, we see geopolitics having a significant impact on companies’ corporate revenue over the next 12-months, especially for companies with high exposure to the Chinese economy.
From the macroeconomic lens, investors expect the US economy to avert a recession in 2024, albeit at a slow growth rate. Our thesis is based on three factors; Firstly, demand remains robust, and consumer sentiments remain elated despite lingering high prices. Second, the after-effect of the high interest rate regime on corporate earnings will likely start to ease, owing to normalisation of rates by the Fed. Lastly, we expect the US strong labour market to keep wage growth relatively stable for 2024. With that said, we expect a relatively tough first half of 2024 and advise more people to keep their budgets lean, emergency funds funded, and their investment plans disciplined.
In terms of asset classes, in the equities market, stock strategists are paring their high-flying profit forecasts and predicting that economic growth will have to pick up for US stocks to repeat last year’s rally. In the fixed-income market, bond traders are unfazed by the pullback in rate-cut bets, seeing this as an opportunity to lock in elevated Treasury yields before the Fed starts to ease policy. Our outlook for the real estate market remains positive. Housing supply is still constrained, which should keep a floor on home prices, translating to household wealth in the US holding steady. Lastly, in this world of 5% interest rate, it is always worth talking with a financial advisor about the best way to align your portfolio with your goals.