Let us first wish all readers a prosperous New Year in 2024 before we start!
In the flash of an eye, another year has concluded. The transition from a recessionary discourse to one of a soft landing has defined the financial landscape. Notably, 2023 stands in stark contrast to 2022 as trends reversed. What headed south in 2022 went up in 2023. The S&P 500, in particular, enjoyed a phenomenal run, ending up 26.2% erasing all its losses in 2022 and more. We also see a shift of funds from defensive to cyclical stocks. Technology, communications, and discretionary stocks, in particular, bounced back strongly. Bonds, which were severely hammered in 2022, finally got its break and managed to deliver a positive return, albeit modest, this year. Conversely, commodities, which were the darling of 2022, emerged as the only asset class that was in the red this year as inflationary pressure receded.
Allow me to provide you with a quick recap of the key highlights that shaped 2023:
1. The US Federal Reserve and interest rates
Much like 2022, it would not be too far-fetched to say that 2023’s market was in a large way influenced by the market’s expectations of what the Federal Reserve will do and how it will impact future interest rates. The US Federal Reserve started the year on the hawkish side. While headline inflation has abated substantially, core inflation persisted way above the Fed’s target of 2% amidst a stronger-than-anticipated economy and labor market. Even till 3Q 2023, the Fed was still putting another possible hike on the table before the year ended. That said, markets were not convinced and have been pricing in a more dovish move despite the Fed’s messages. Indeed, the Fed’s stand took a notable shift in the last FOMC where they signaled a stop to further hikes and three quarter-point cuts in 2024.
2. Banking Crisis: Silicon Valley Bank, Signature Bank, Credit Suisse
Although it may seem distant now, markets did go through a harrowing experience as heightened interest rates triggered bank failures one after another. It first started with Silicon Valley Bank (SVB) which sparked a run after it had to sell its investments at a loss to raise cash to meet withdrawal demands. Shortly after, the contagion spread and depositors worried about their money caused another run at Signature Bank. Signature Bank was subsequently shut down by the regulators. But what tops all these was the collapse of Credit Suisse, a Tier 1 bank capable of causing wider systemic failure. The episode also revealed a key risk with CoCo bonds (Credit Suisse’s CoCo bonds were wiped out), which before the event, were regarded as a safe bet that gave good yields.
3. Ding and Dong Across the Debt Ceiling Talks
In mid-2023, the US stock markets see-sawed as the Republicans and Democrats clashed during the debt ceiling talks. This is not the first time such a debate took place. Each side was trying to hold the other ransom using the debt ceiling as a means to further their aims. It seemed incredulous because failure to raise the debt ceiling will invariably lead the US to default on its debt and this will result in extensive damage globally. The consequential costs far outweigh whatever policy advantage the parties are trying to gain. That is also why since 1941, the US has always raised its debt ceiling and they have done so more than a hundred times raising it from $49 billion to more than $30 trillion. Politicians are after all still capable of working out the math. However, that doesn't seem to prevent the same fiasco from happening again and again.
4. August to October – The Months With Almost No Safe Havens
After a good run in the first 7 months of the year, almost all asset classes dived consecutively over the next 3 months from August to October. A combination of different factors may be at play. The dominant factor we believe is the hawkish pressure from the US Federal Reserve and exceptional economic and labor strength at a time when the market prefers a weaker outlook to arrest inflation and temper the Fed’s next move. At the same time, energy prices were resurging as Saudi led OPEC to cut oil supplies in a surprise move causing unease in the market. September and October have also been seasonally the worst months for equity markets in history. That may have prompted more investors to sell to reduce their exposure or lock in their profits amidst what has already happened.
5. The dramatic reversal in the last 2 months after the Fed softened its stance
The Fed softened its tone in November FOMC. That led to a dramatic reversal in sentiment that sent the market up in a powerful rally across equities, fixed income, and REITs. Even though some Fed members did attempt to contain the euphoric mood in their speeches after the FOMC, markets went ahead nonetheless. In a single month, the S&P 500 recouped what it lost over 3 months. Yields fell drastically across the curve and we saw a major up move in prices across the US Treasuries in the last 2 months of this year that brought them back into positive territory. Reits also benefitted from the drop in yields and saw a spectacular rebound.
PORTFOLIO UPDATES
Our multi-strategy model portfolio was up +3.0% in December and +16.5% for the year 2023.
Adjusting to a more bullish environment this year, our model portfolio took a higher exposure to equities and held less cash this year as compared to 2022. Allocations to defensive and energy sectors came down while technology, consumer discretionary, and materials sectors were increased. Commodities, a key winner that buffered against a good part of the model’s losses in 2022, were also reduced in 2023. All these help to contribute to this year’s returns. But this year’s best-performing asset class for us is Volatility. The model has tactically taken on a short position on Volatility for most of the year and despite being just a small part of the entire portfolio, it is the largest contribution to the overall portfolio this year.
We wrapped up a good year, let’s move on to take on a brand new 2024! Once again, wishing all a wonderful year filled with an abundance of health, wealth, and happiness!
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* This is the model performance of portfolios constructed using more advanced strategies than those taught in our courses. They can be implemented with the assistance of an iFAST Global Markets (Singapore) senior investment adviser. Note that live performance may vary due to execution price slippages, the difference in sizing precisions, etc. All performances are measured in USD terms.
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