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2023 Recap 2024 Preview

2023 Recap 2024 Preview

December 21, 2023

It finally happened!

We have been preaching patience looking for a peak in interest rates for the last 6 months.

The Federal Reserve paused and did not raise rates in September. On October 19th, the 10 year treasury bond peaked at 4.99 percent and since then rates have come crashing down. The 10 year treasury closed at a yield of 3.91 percent on December 15th.

Recently, we got 2-3 months of soft CPI and PPI data showing inflation coming back down toward the Federal Reserve target of 2% which was the green light for no more hikes and started the decline in market rates.

This was the move in rates we have been looking for and have been talking about all year. Did we think 8 percent mortgage rates and 10-15 percent corporate borrowing rates were going to stick around? We didn’t think so. We felt very strongly that rates were clearly overshooting to the upside. The US economy with trillions and trillions of dollars of debts- corporate, personal, governmental- could not possibly survive if all the embedded debts were repricing with where rates were going. Look for an even slower economy in 2024 with rates still fairly high in relation to where they have been the last 10 years. Recession in 2024 is still possible.

The effect on asset prices has been nothing short of breathtaking. Municipal bond prices are up 10% since late October. Stocks have made new highs for 2023. The NAV value increases in our usual suspects of bond funds-high yield, floating rate, multi asset, short duration- have gotten everybody well into the green for 2023 as we continue to receive our substantially raised dividends. NAV increases make our account values look good but doesn’t change our income streams so we would be fairly dismissive of what it all means longer term. We knew rates would come back down. They went straight up through October 19, then have plunged in the last 2 months. We are not the least bit surprised. We predicted it. It’s simple math actually.

We would strongly advise you to look at your current statements if you have not done so. You will be very pleased. Interestingly, we have had many clients add to their fixed income portfolios, some very substantially in the last 6 months, and they have significant gains from these investments. Patience has been richly rewarded.

Like we have said, we have made very few changes to client portfolios the last 2 years. We said to hang in there, interest rates will peak, and we will get a lot of NAV back in a short period of time. That is exactly what has happened. But we also are receiving substantially increased dividends which makes retirement income a lot more comfortable for all of our clients. Happy times!

What’s next? What’s coming in 2024? What changes need to be made?

We see a lot of opportunity in the bond area. There are some parts of fixed income that offer more opportunity than others so we will be talking to you on how to make some changes to be more optimally positioned but on balance we will take our income streams from well run, professionally managed, low cost funds with excellent long term track records. Our approach to investing will always be consistent and thoughtful. Longer term that always works.

Like all years, next year will have lots of potential volatility. We have a presidential election, a Federal Reserve trying to orchestrate a soft landing for the US economy, a skyrocketing federal deficit, multiple wars, geopolitical uncertainty in many regions and a slowing labor market. As is typical, unforeseen events can create new challenges for investment returns. We will be here as always to help you through it all.

Our best and sincerest wishes for a happy, healthy and joyous holiday season!

Talk to you all soon.

All the best,

Chris

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.