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A look at history to understand why the market performed the way it did this year

December 21, 2023

In my past commentary, I answered the question of why we weren’t invested in the Nasdaq and large-cap growth stocks at the beginning of the year and why we underperformed. In this commentary, I am going to . 

If we don't honestly review the lessons of the past, then we are likely doomed to repeat those same mistakes in the future. Not only is that foolish...but highly unprofitable. And that is the importance of doing this annual review of 2023 Stock Market Lessons Learned to improve our odds of topping the S&P 500 (SPY) in the year ahead. 

Our 2023 Stock Market Lessons Learned starts with appreciating that the most dangerous expression in all of investing is..."This time is different." 

That is rarely ever true because history typically repeats itself, and that is the safest bet for investors. That is why almost everyone at the beginning of this year predicted a recession forming with the deeper bear markets to follow once inflation spiked, and the Fed embarked on one of the most aggressive rate-hiking regimes in history.

Consider that 12 of the last 15 times the Fed has raised rate, we have entered a recession. On top of that, the Fed typically has a positive bias in their outlook, calling for a soft landing, and yet still, 75% of the time, a recession unfolded.

Amazingly, this time around the Fed actually predicted a mild recession before their hawkish policies concluded. Add that to the historical track record, and it only makes sense to bet on recession and a bear market. Yet amazingly...this time is different.


Let's not forget that the yield curve inverted. That's when short-term rates become higher than long-term rates (typically comparing the 2-year vs. 10-year Treasury). Which is always the result of bond traders predicting further interest rate increases and predicting a future recession. 


And yet here again...this time is different as no recession emerged.

Of course, the key question now is...WHY was this time different? 


As it turns out the onset of Covid pushed 2 to 4 million American workers to choose early retirement instead of going back to work. This made the jobs market amazingly resilient as virtually any skilled person could find employment. Thus, no matter how hard the Fed stepped on the brakes of the economy with their rate hikes...they could not hurt the resilient employment market. And without job loss...there is no income loss...and thus no drop in spending.

That is how the economy broke with tradition and remained in growth mode. Gladly, inflation was tamed in the process, creating the pathway to a soft landing and resumption of the bull market. Understand that no one knew that this time would indeed be different, and you were more likely to win a bet on the recession based on history. 

Those of us with a fundamental bias found it harder to appreciate this change that broke from historical norms. I am glad there is a counterbalance to fundamentals that I have come to appreciate more and more in my investment process.

Price action in the stock market is based on what the market sees 4 to 6 months out. So the action in stocks in January through March was, by some opinions, based on the feeling that things were going to get a lot better within 6 months, which would have been the summer. The reality was that by the summer, things were yet to be determined as the Fed was still predicting further rate hikes and, recession was still a reality and inflation was still stubbornly high. 

As a result, stocks corrected at the end of the summer. That correction was not a prediction of future fundamental events, it was a reaction to disappointments with the economy not improving as much as the stock market was anticipating. It did not correct enough to erase all of the upturn in the first months of the year because the fundamentals were indeed improving, and the market was beginning to see that. 

So many of us who use fundamentals as a foundation of all investing, were caught out of this market at the beginning of this year, but those that were merely following the momentum of the market were surprised by the sudden downturn in the fall. We did react to positive fundamentals in September when we knew the Fed was done with interest rate increases and when the inflation was down to 3%. We further believed that the mild or no recession was possible and probable. As a result, we changed our portfolio to take advantage of the positive fundamentals and ride the wave of the new bull market for the end of the year. 

The lesson here is that history typically repeats, but there are times when history does not help you improve your results. Those times are rare and should not be depended on. I will continue to look at the fundamentals for direction and positioning. 

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