Another year will soon enter the history books. If I had to pick one word to best describe the stock and bond markets in 2023, I’d choose the word, vicissitudes. Fittingly, this word was often used by Warren Buffett’s mentor, Benjamin Graham, in his seminal book, The Intelligent Investor. Vicissitudes; a change or variation in the course of something.
About a year ago at this time, the stock market was 25% to 30% off its peak. To make matters far worse, bonds were also experiencing one of their deepest bear markets ever, down around 15%. Together, it resulted in one of the single worst periods for balanced portfolios. In all practicality, there was almost no place to hide. Doom and gloom had descended upon the scene.
With such negativity already baked into the cake, it left open the possibility that things might actually turn out better than feared. As we all know now, inflation basically peaked at this darkest moment, declining from around 8% to just about 4%. By the end of July, the stock market breathed a heavy sigh of relief by rising a whopping 30% off its low and the bond market returned almost 5%, too.
At this point in time, the worries of a looming recession this year began to fade. Inflation was in steady decline, as they had hoped it would be, and the economy was seemingly cruising along relatively unharmed by so many rate hikes. This was the case even in the face of a mini-crisis in banking that was uncomfortably reminiscent of the ’08 financial crisis. Goldilocks had confidently entered the scene.
Then, as if right on queue, the progress on inflation stalled out with the economy inconveniently picking up steam. In response, the Fed shifted its tone to one of cautious vigilance and signaled the possible need for still more rate hikes to avoid the mistakes of the ‘70s. Almost overnight, longer-term rates jumped higher and stocks fell over 10% and bonds dropped 5%. The lights dimmed and Goldilocks exited stage left.
Naturally, the show never really ends. Over just the past few weeks, Fed officials are seeing signs of the long-awaited economic slowdown and the most recent inflation report showed some renewed progress. They have calmed investors’ nerves by publicly signaling they might actually still be in pause-mode. In truly knee-jerk fashion, just like that both stocks and bonds have almost fully rebounded from their post-summer swoon.
Now, if anything is true, 2023 certainly shows how impossible it is to forecast markets. Nonetheless, if I were forced to make a forecast, I’d say it’s wise to count on the continued vicissitudes of markets to darken the stage a few more times. After all, we all know that Goldilocks is a fairy tale.