Q4 2023 Commentary: Surprised Again?!? Main Street vs Wall Street
Pine Haven Investment Counsel, Inc.
Paige Johnson Roth, CFA®
Surprise! The markets reversed themselves in 2023 after a bleak 2022. Stocks were bolstered by the Federal Reserve Board's aggressive rate hikes (the fastest since the 1980s stagflation era) and the reverse of the Quantitative Easing (QE) policies which, for a decade or more, flooded the markets with liquidity. There were persistent fears of a recession and market economists were comparing this perfect storm of headwinds to the declines triggered by the 2008 financial crisis. In one poll taken at this time last year, 85% of economists predicted a recession.
What happened? In a word, the pundits were wrong. Throughout 2023, particularly in the final quarter, the markets blew through the headwinds and posted unusually high gains nearly across the board. A breakdown shows that just about every U.S. investment category was showing double-digit gains, with the S&P 500 (large US stocks) returning 26% last year. And the dramatic interest rate movements in 2022, which led to unusually steep losses in bond portfolios, thankfully didn't carry over to 2023. Yields on 10-year Treasury bonds rose from 3.8% to 4.7%. And fixed income returns for the year were back in the positive as for example, the Bloomberg US Aggregate Index was up 5.5% for the year.
Despite the strong market returns and overall healthy economy, there is a disconnect between Wall Street and Main Street. On the positive economic side, unemployment is at historical lows, the GDP grew 4.9% in the 3rd quarter, inflation is down, and wages are growing. A quick glance at the snippets from economic and market headlines – “soft landing in sight”, “inflation trending back to target”, “bond yields still attractive” – might lead to a belief that consumers should be content.
One way we measure contentedness and optimism with the state of the economy is with the Consumer Sentiment Index (University of Michigan), and this index has been slow to improve.1 As of mid-December 2023, the Index was at 69.7 (up from 61.3 the month prior) as consumers were in a more optimistic mood. However, this is below the historical average of 85. A recent CBS Poll reported that only 35% of people felt the economy was good.
The issue is that the average consumer isn’t seeing the good economic numbers reflected in their everyday lives. Inflation is a four-letter word that rises to the top of the economic ailments for many. Housing, cars, and services are more expensive, and US households earning less than $71,000/year have seen their disposable income decline for five straight quarters. The average monthly mortgage has more than doubled since 2013, and it has risen by more than $1,400 since 2020. Only 15% of homes were deemed “affordable” this year.2 Average childcare costs have risen by more than 30% since 2019, and a record high percentage of consumers who finance new vehicle purchases are paying more than $1,000/a month as the price of cars has increased. Despite these higher prices, we can’t stop spending. Many consumers’ savings accounts were bolstered during the pandemic shutdowns, but that’s getting used up. Overall, Americans are billions more in debt.3
As we head into this election year there will be plenty of pundits, polls and politicians commenting on the state of the economy. Traditional measures of the economy are strong – low unemployment, moderating inflation, and a strong stock market. It will be interesting to see how it all plays out.
Overall, our investment recommendations have not changed (stay the course), however, it is important that we revisit your short- and long-term financial goals periodically to ensure your investments are in alignment with those goals. We want you to feel confident in the path forward. As always, we encourage questions and comments, and we look forward to talking with you soon. Thank you again for the opportunity to serve you and your family. It is a privilege.
1http://www.sca.isr.umich.edu/
2Affordable” - the estimated monthly mortgage payment is no more than 30% of local county median income.