Annual Client Letter – 2024 Patience & Discipline
With the last calendar year now officially in the books, it is time to reflect on what it was and how it came to be. In past annual letters we have used certain words to describe how each year has felt. In 2020 that word was “grit”. Having the “grit” to get through a very tough year by focusing on the passion, resiliency, perseverance, conscientiousness, and courage needed to take on future events. In 2021 that word was “progress”. We remained hopeful for a brighter future and continued to be resilient in adapting to changing conditions. The word we used to describe 2022 was “reset”.
Characterizing this past year
Some of the words that our group produced to describe the events of 2023 included:
- Challenging – difficult, in a way that tests your ability or determination.
- Discipline – train oneself to do something in a controlled and habitual way.
- Growth – something that has grown or is growing.
- Patience – the capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset.
- Perseverance – persistence in doing something despite difficulty or delay in achieving success.
- Potential – having or showing the capacity to become or develop into something in the future.
- Reactionary – opposing political or social liberalization or reform.
- Rebirth – the action of reappearing or starting to flourish or increase after a decline, revival.
- Recovery – a return to a normal state of health, mind, or strength
- Renaissance – a revival of, or renewed interest in something.
- Rewarding – providing satisfaction, gratifying.
- Speculative – involving an elevated risk of gain or loss.
The words that we decided on to use to describe 2023 “patience” and “discipline.”
Learnings from this past year
2023 was a year filled with major macro economic events that pulled market returns, at times, in opposite directions. Some of the macro events included a reversal from a bear market to a bull market, reduced inflation numbers that resulted in a pause in interest rate hikes, and geopolitical instability. Each of these macro events required us to be patient and disciplined in our approach to investing.
A bear market is called a bear market because a bear tends to attack with a downward blow. A bull market is called a bull market because a bull tends to attack with an upward blow. The S&P 500 started 2023 at 3853 points, coming out of a bear market from 2022, and ended 2024 at 4769 points, a new bull market that had an increase of 23.77%. However, most of the annual returns came in the later part of the calendar, the last two months of the calendar year to be precise.
Higher returns were not limited to US equities, we had positive returns in the bond market as well, something that was not found in the previous calendar year. The FTSE Canada Bond Universe Index finished 2023 with a gain of 6.7%. Again, most of that return happening in the last two months of 2023. So, what led these positive returns, why did they occur after such a bleak 2022? Well, the answer is that inflation was trending down because of the aggressive interest rate hikes that occurred in 2022 and 2023. This resulted in central banks taking a pause on their interest rate hikes which is directly correlated to the higher equity and fixed income returns that we experienced at the end of 2023. However, to participate in the recovery period you would have had to be patient and have the discipline to stay invested through the entire year.
Geopolitical tension was high in 2023 and remains high to start 2024. With current conflict in Israel and Gaza, along with the on-going war in Ukraine, there is a lot unknown regarding how these issues will be resolved. There are current economic consequences from each of these conflicts, some resulting from the disruption of supply chains and materials. There is, of course, human consequences from war. Something that we have a challenging time understanding and rationalizing. Nobody knows how long these current issues will persist; however, we can look back at history to see that past conflicts have impacted markets and economies in the short term. In the long term these same markets and economies recover and persevere.
Geopolitical tension was high in the US in 2023 and remains high in 2024, fueled by an election year and a divided population. We do not know how this will play out in 2024, but we can again look back at history to see the impact of US politics in markets and the economy. Markets and the economy can be impacted in the short term but remain resilient and strong in the long term. The market is forward looking and has not cared if a democrat or republican was in power in the long term. As much as the headlines make for interesting headlines today, they do not mean much regarding long term results.
Where do we go from here?
There have been numerous market cycles over the prior years and decades. Each time we have had a bear market it has been followed by a bull market, every single time. As much as it feels like tough times will not end when we are in them, as long as we stay disciplined and patient they always end and are replace by good times ahead.
It can be challenging at times to stay patient, even more so when we are surrounded by negative news headlines. All our investors who remained invested during 2022 and the first 10 months of 2023 should be commended for their patience and discipline. This next year will again have some events in it that may lead to investors being reactionary, or feeling like they need to be reactionary. Possibly feeling the need to speculate on a certain direction. If you find that you are feeling this way, please reach out to us.
There is a reason that we are so focused on planning during our interactions. We can not plan for unforeseeable events ahead; however, we can ensure that the principles that work are followed. We can help people focus on their risk levels and manage those risk level through proper asset allocation and diversification. We can help investors reduce their taxes and expenses, the hidden fees that erode from returns.
Conclusion
Investors are rewarded for having the confidence, trust, determination courage and resolve to stay invested during many different market cycles. Focusing on the long term, not the short term, provides us with the ability to participate in the next period of expansion. There will always be macro economic events to contend with. As much as headlines feel different today, they are like previous headlines that occurred during different market cycles. The past can not repeat itself, but at times it certainly can rhyme. It takes patience and discipline to be rewarded in the long term and our investors have shown those principles during the past few years and are further ahead for it.
Stay well and stay invested in 2024!
The CM Group