Portfolio returns have been on a tear in 2023, especially in contrast to the brutal year that investors experienced in 2022.
As of late December, the S&P 500 had climbed roughly 25%, while the Blackrock 60/40 Target Allocation Fund was up 12.5%. The performance of bond portfolios, meanwhile, has improved significantly over just the past eight weeks, with what appeared likely to be another negative year for bonds turning into a pleasantly positive one.
According to experts convened for a recent ThinkAdvisor webcast, organized in partnership with the Investments & Wealth Institute, this is a textbook moment for investors to pause and take stock of their positions.
Yes, performance has been solid, but there are compelling arguments to be made about both the risks and opportunities that may emerge in 2024 across all manner of asset classes, especially fixed income.
Speakers on the webcast included Ryan Detrick, chief market strategist at Carson Group; Robert Miller, CEO at Frontier Asset Management; and Zachary Christopher, a client portfolio analyst for Hightower Advisors. The trio offered a variety of perspectives about what's in store for investors next year, but they all agreed with the sentiment that advisors must be vigilant.
That doesn't mean that investors should rush out and make ill-timed trades or try to time the market. Rather, this is the time to reassess any progress that has been made toward long-term goals, and to ask whether there is an opportunity to refine portfolio strategies moving forward.
A Tale of Two Equity Markets?
When it comes to the positive performance of the equity markets in 2023, one word came to mind for the panel — concentration. They all agreed that the question of whether performance can continue to diversify away from the biggest names in 2024 will help to determine what kind of a year that stock market investors have.
The past eight weeks have seen this hoped-for diversification in performance (or "participation") begin to happen, Detrick noted, but it's anyone's guess whether that will continue. For their part, the panel voiced a cautious sense of optimism, especially Detrick.
As the panel explained, the so-called "Magnificent 7" — a term referring to the grouping of Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta — saw very strong performance through the waning days of December.
These companies' gains have moderated more recently, but they have still posted very solid returns for the year and are responsible for the majority of the positive 2023 performance.
The result of this dynamic, Detrick said, is that any investors whose portfolio strategies have seen them underweight these key names have seen their performance lag significantly behind the full market index. This has delivered a difficult year for active fund managers who bet against sectors like technology and communications — or the Nasdaq as a whole.
"The tech and communication sectors have done so well this year, with some indexes posting gains above 50%," Detrick said. "What is encouraging to us looking ahead is that we do see evidence that this performance will continue to broaden out. That would be a great thing for investors."
More Than the Magnificent 7
In arguing that 2024 could see impressive and more diversified performance for stocks, Detrick pointed out that recent weeks have seen more than 90% of the stocks in the S&P 500 closing above their 50-day moving averages.
"This might mean we are near-term overbought, but you also tend to see this kind of strength at the beginning of bullish moves," he suggested.
As Detrick noted, in previous times over the past 20 years that the market saw such strong participation, the S&P 500 was higher a year later 14 out of 15 times — and up 16.1% on average. This is yet another clue that stocks could be in a for a nice year in 2024, he argued.
Miller and Christopher broadly agreed with that take, and with the suggestion that investors may benefit from rotating back toward small-caps stocks in 2024. Miller also pointed to attractive opportunities in emerging markets (with the potential exclusion of China), while Christopher highlighted the potential for significant diversion between value and growth-oriented investments.
Christopher and the others also argued that 2023 showed that "60/40 isn't dead," especially with the performance posted by bond managers over the past several weeks. Looking ahead, there is good reason to argue that diversification and maintaining a long-term perspective will serve investors well next year.
