Market Data for Year-End 2023:

• S&P 500 Stock Index: 4770, up 24.2%
• Ten-year Treasury Note Yield: 3.87%, down 0.01%
• Gold: $2,072 per ounce, up 13.6%
• Oil: $71 per barrel, down 10.8%

2023 produced standout gains for the S&P 500, mostly on the back of explosive moves in large, glamorous technology companies (although returns for the index did broaden out to other sectors of the market in the final two months of the year.)  Bond yields, although little changed on the year, went on a rollercoaster ride compelled by ever shifting investor attitudes regarding the outlook for economic growth and inflation.  Gold benefited from the general drift higher in asset prices, while oil was down on the year due to moderating global economic growth along with record production from US shale drillers.

We can identify three primary underlying themes that drove share prices in 2023.  The first was an unwavering investor belief that the US Federal Reserve would inevitably return to a market stimulating “easy” monetary policy.  The second was a textbook “New Era” speculative mania over artificial intelligence.  Last, but certainly not least, was investors’ fear of missing out on spectacular returns, often referred to by its acronym “FOMO.”

Noticeably absent in all of the above was any regard for what stocks are actually worth.  What passes for “investing” in today’s market is chasing lines on a chart and telling stories to rationalize it.  Unfortunately for those who engage in such naiveté, it is an inescapable law of investing that price and value inevitably converge because if they did not, asset prices would spiral into a state of absolute absurdity.  For instance, there’s a reason why tulip bulbs today cost no more than fifty cents rather than hundreds of millions of dollars, and that the darlings of the Dotcom bubble of the late 1990s are not worth hundreds of trillions of dollars.

This being the case, the question is when, not if, the current market obsession with lines and stories comes crashing back to physical reality here on planet Earth.  We do not have a precise answer of course, but our conservative approximation would be sometime within the next three years, which is well within the investment timeframe of your stock portfolios.  While the Federal Reserve is certainly biased toward accommodating a state of perpetual speculative mania, they are neither omniscient nor omnipotent and their ability to levitate markets in the manner of the past decade is not what investors believe it to be.

Since 2008, the Federal Reserve has increased the supply of dollars in circulation from 5% of US gross domestic product (GDP) to 30% today.  They accomplished this primarily by using money conjured out of thin air to purchase US Treasury securities and mortgages guaranteed by the Federal government.  As the recent bout of price inflation has demonstrated, there is an upper bound to this largesse, and the idea that the Fed will be able to increase the supply of dollars at such a rate moving forward simply is not credible.

Distorted by the “easy” monetary policy described above, current asset prices are unsustainable. When the inevitable correction comes, sizable losses are likely for the glamorous assets of the current mania while solid returns are likely for those which were punished for lacking said glamour.  In other words, investors will wake up to the fact that we live in a world of single digit growth and realize their expectations for endless returns well into the double and even triple digits were a fantasy.  This will likely lead to a reevaluation, appreciation, and substantially higher share prices for the shares of companies that reliably grind out cash flow and dividends, such as those found in your portfolio.

As far as exogenous risk factors are concerned, the one we believe to be least appreciated is the potential for political instability and violence accompanying the 2024 Presidential election.  This is by no means a certainty, but the events of January 6, 2021 demonstrate that it is a very real possibility.  Given the further poisoning of national politics in the years since, more of such violence and on a much wider scale is a distinct possibility.  That having been said, even if such an outcome were to come to pass, never underestimate the ability of American investors to ignore the outside world and remain safely within their speculative bubbles.  For example, the US stock market continued to rally on the very day the US Capitol was being ransacked…  “What me worry?”

In 2024, we expect the US stock market, as represented by the S&P 500 stock index, to trade in a range of 4100 to 5300.  (It finished 2023 at 4770).  While US markets are currently enjoying considerable momentum and the US economy continues to grow solidly in the context of inflation that is moderating toward the Federal Reserve’s 2% target, investor sentiment and economic fundamentals can certainly change.  Given the inherent fragility in market prices and potential political instability described above, 2024 could witness much higher levels of volatility than 2023, which explains the wide range of our forecast.

As always, we appreciate your business and the confidence you have placed in us and hope you have a happy, healthy, and prosperous 2024.  Please do not hesitate to contact us if you have any questions regarding your investments.

Sincerely,
Patrick Mauro, Daniel Mauro, Anita Mauro, Henry Criz

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