Q4 2023 – Market Update

By Contessa Archuleta on February 8, 2024

The Markets – Kyle Burns:

After a strong year in the markets, it is always fun to look back at predictions from the prior year and observe how many of the experts missed the mark with their predictions. At the end of 2022, forecasters were worried after a difficult year and their predictions showed their apprehension around market returns in the year to come. Their outlooks warned of heavy fog, below average returns, or economies on the brink of recession. Thankfully for investors, the investment markets did not read the headlines.

Investing in 2023 turned out to be a great year for the investment markets. In 2023, the S&P 500 returned 26%, European Equities 15%, Emerging Equities 10%, and even the US aggregate bond market returned 5.6%. The markets were not without their challenges and during the year, there were bank failures, persistent inflation, and a lack of breadth in the US stock market that indicated that the economy may not be as strong as market returns were indicating. The lack of breadth was highlighted by the performance of what has been dubbed as the “Magnificent 7”, or Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. These seven stocks accounted for approximately two-thirds of the S&P 500 returns in 2023.

Many of the headlines for this year read similar to those of last year as we look forward. I found a quote during my research that I felt perfectly summed up how we could look at the year ahead. From Andrew Pease, Chief Investment Strategist with Russell Investments, “We are in a twilight zone between slowdown, possible recession and recovery, where nothing is likely to be quite what it seems.” The quote sums up perfectly where we see ourselves today. We have come off of a euphoric high created from strong market returns, 5⁺% yields on cash and short-term treasuries, and an imminent recession that was avoided in 2023. We break out some key factors that we see as important for the year to come that could create an impact on investments throughout the year. Highlighting these, we look at the good and some of our concerns.

First the good. The Federal Reserve (Fed) is likely done raising interest rates and they are predicted to begin easing rates in the first half of 2024. Any easing by the Fed will be looked at positively by the economy and will reduce strain on borrowers from both the corporate world and with individuals. The Fed will need to be cautious in their approach to reducing rates as they will not want to overstimulate the economy and reignite inflation. The inflationary pressures and higher interest rates created a decline in estimated earnings for US companies in 2023 when compared to earnings in 2022. Earnings for US companies are projected to increase 11.8% in 2024 and put growth back on trend beyond the levels seen in 2022[1].

Jobs are another highlight for the US economy. Even as a worry of recession loomed over the economy, the job markets remained strong and unemployment remained low. The availability of work combined with declining inflation to create a strong consumer that could start to enjoy the benefits of higher wages with lower process. Excess savings in the economy created a strong consumer last year and job stability with lower prices may be impactful as consumer savings are depleted. Since the pandemic, workers were more likely to quit their jobs than in past years due to the high number of jobs and growing wages. The quit rate, which measures the share of quitting employees compared to all employees, dropped to pre-pandemic lows after the second quarter of 2023. This could stem from worries over the economy, but will lead to a more stable labor market and more consistent individual earnings that rely less on savings for consumption.

What should investors be concerned about in the economy in 2024? Inflation continues to be the biggest concern in the economy. The Fed has an inflation target of 2%. While inflation has come down from its peak, the 3.4% inflation read at the end of December 2023, is far from the Fed’s target. The Fed will be forced to keep interest rates higher to slow the economy and fight inflation if the rate continues to be above the target level. There could be negative effects to the economy if the Fed decides to keep rates higher for longer. The prediction is for the Fed to start easing rates this year, but it is likely that the rates will remain at rates above recent levels dating back to 2008. These higher rates can have big impacts on borrowers.

The borrowers most impacted by this the most are those with lower rated credit profiles, corporate and individuals. Those with lower credit profiles are more likely to have higher proportions of debt to income and are more impacted by higher borrowing costs. Throughout 2022 and 2023 we have seen rising delinquencies on loans that could become problematic. This is further exacerbated as individuals and corporations spend down their savings that were built up through stimulus that was sent out during the pandemic.

Given the good and the concerns, how should investors be positioning their portfolios for the year ahead? As a reminder, each investor has different goals and any investment decision should be discussed with your advisor or consider your own objectives.

Higher interest rates present an opportunity to lock in consistent and stable income. Investors piled money into short term cash alternatives in 2023, but returns in cash alternatives will decline as the Fed reduces rates. During the last two easing cycles, 2001/02 and 2007/08, investors in portfolios of bonds saw returns of 7.8% and 5.2% respectively. Over the same time period, investors in money market funds saw returns of 2.3% and 2.2% respectively[2]. The opportunity to lock in the higher levels of income and returns will decline quickly as the Fed reduces rates.

On the equity side, quality investment factors appear to present an opportunity. Historically we have seen quality factors outperform during an easing cycle. They also are better positioned if the economy were to move into a recessionary period. Quality factors relate to company metrics around consistent earnings growth, dividend payments, debt to equity ratios, or other measures. There could also be opportunity in companies with growing revenues that did not see their valuations increase greatly during 2023. The lack of breadth in the market saw many companies with strong earnings growth experience lower returns in 2023. A recovery could be potential.

Investors should also be looking at thematic opportunities in the markets. Watching the rapid increase of artificial intelligence could lead to opportunities in semiconductors, data analytics, or IT consulting. After a bad year for health care companies, could pent up demand and favorable valuations lead to a breakthrough? Interest rates are expected to decline and lower mortgage rates combined with housing shortages could make homebuilders attractive. There are a variety of themes that are worth discussing for those with a long-term investment horizon.

The year ahead holds many unknowns and as we always remind investors: Understand your goals, maintain a long-term perspective with risk assets, don’t time markets or chase performance, and keep an appropriate diversification strategy.

Artificial Intelligence and a Labor Shortage– Keren James:

Will AI replace jobs? Is it a problem to be solved, or might AI solve the problem of a persistent labor shortage?

When I was in California visiting my parents over the holidays, my mom asked me and my brother what we thought about AI and if people will lose their jobs to it. My mom is 85 and my dad will be 90 this year. It is safe to say they have lived through more technological advancements and innovations than those of any other modern-day generation, thus far.

We’ve all heard the chatter about ChatGPT over the past year. Students are using it to write papers, and professionals are using it to write emails and draft marketing content, among other uses. The painter, David Salle, spent a year working with two technologists to train an AI program to mimic his paintings.[3] On the opposite side of the debate, Hollywood writers went on strike, stopped working their jobs, to fight for the right to keep doing them rather than have an AI program take over or copy their work.

The origins of the labor movement are rooted in a fight for fair working conditions, higher wages, and the protection from the mechanization of jobs. Starting in the late 1800s, workers began to organize, protest, and eventually lobby Congress to pass legislation that would protect their jobs and their lives. Such legislation would not pass until well into the 20^th Century. Today, we are witnessing a resurgence in union membership and the fight for better pay and job protection.

At the same time, the pandemic brought on the Great Resignation as workers reevaluated their work-life balance. Many of those who left the workforce chose not to return, and employers have been forced to increase wages and offer unique benefits such as remote or hybrid working models to win and retain workers. At the end of 2023, even with these accommodations, the labor force participation rate was 62.5%, still below the 63.4% seen before the pandemic in February 2020. While the number of those dropping out of the workforce has slowed, those resignations have been replaced by the Quiet Quitting and Minimum Monday trends, which entail employees doing the least amount of work possible in the hope of avoiding burnout.

In addition to this shift in the American work ethic, the demographics of our aging workforce and U.S. birth patterns over almost 80 years have resulted in a smaller workforce. Curtis Dubay explains the phenomenon in an article for the U.S. Chamber of Commerce[4].

“The Baby Boomer generation was more than three times larger than the generation that came before it, the Silent Generation. As the Boomers entered the workforce in the early 1960s, labor force participation rose sharply. However, the following generation, Generation X, was smaller than the Boomers. The Millennial Generation is only slightly larger than the Boomers, and Generation Z is slightly smaller than the Millennials.

This has created a demographic shortfall for the workforce. For economic growth, it is ideal for succeeding generations to be larger than the ones before them. Visualized, it should look like a triangle, with younger generations being larger than the ones that came before. Instead, we have an inverted triangle.”

As Millennials and Gen Z have fewer children and birth rates are projected to continue to decline, it is possible that jobs from AI may fill a gap.[5] In 2016, Ginni Rometty, former CEO at IBM, coined the term “New Collar” referring to workers or jobs in emerging high-tech fields such as AI, Cybersecurity, EV, and robotics. The House introduced, unsuccessfully, versions of the New Collar Jobs Act in 2017, 2019 and 2021, with the aim to promote jobs and training in fields such as cybersecurity[6]. We may see a new form of this presented again in the future.

While almost 3.5 million jobs have been lost since 1980 because of personal computing and the internet, millions more jobs were created for computer hardware manufacturers and input industries like semiconductors. The impact of technology can be traced back seven centuries from the horse collar up to the evolution of AI. Since the 1960s in the U.S., China, Germany, Sweden and other countries, evidence points not to fewer but to more jobs created with productivity growth. The invention of the Model T and the internal combustion engine provide the prime example for a cycle in which increased demand stimulates increased production, which results in higher wages and income, which spurs overall economic growth. [7] On farms, horse-drawn plows and other equipment were replaced by tractors, but that transition took place over at least three decades.

As seen with farm production, research shows that workers who can adapt and reskill to work with machines are more productive than those who work without them. The costs and prices of goods and services are reduced to the benefit of consumers. Consumers then spend more, which leads to the creation of new jobs.

As long as our workforce continues to shrink, and as long as there are jobs that those in our existing workforce are unwilling to fill, AI may serve as one possible solution. History demonstrates that, with the evolution of AI, jobs will be lost, and more jobs will be created. Regulation will be necessary for AI just as it was for child labor in the Industrial Revolution, and none of this will happen overnight. Hopefully, in time, humans will not become outmoded like the horse collar and AI will supplement rather than dominate our lives.

New Year’s Resolutions – Contessa Archuleta:

Every year during the first couple days of January, I jot down a list of New Year resolutions. These goals consist of personal fitness aspirations, places I would like to visit, and larger purchases or upgrades to our home, which I would like to achieve in the coming year. My husband and I have been doing this self-reflection exercise for the last 15 years or so. As I accomplish these goals throughout the year, I find great satisfaction in “checking them off.” And for those goals that are not completed, I will carry them forward to the following year.

Most people start the new year with multiple resolutions. Have you been able to keep your New Year’s resolutions so far? If not, you are not alone. On October 23, 2023, Forbes Health/One Poll conducted a survey on 1,000 Americans[8]. This survey revealed that the average resolution lasts 3.74 months. Only 8% stick with their goals for one month, 22% last two months, 22% last three months, and 13% last four months. Rather than shoot for the moon and set goals that are most likely unachievable, consider narrowing down your priorities and reflecting on which areas you can incrementally shift to achieve those goals.

I encourage you to reflect on your financial health when setting your New Year’s resolutions each year. The new year gives everyone an opportunity to review their personal finances, which should include short-term and long-term financial goals. I prepared a checklist to review your own financial health (and your partner) as you begin the new year. It is important to review these topics at least annually and put a financial plan in place.

Checklist:

1) Track your assets and liabilities -prepare a personal balance sheet.

List your assets (real estate, vehicles, retirement accounts, investment and savings accounts); and
List your liabilities (real estate loans, vehicle loans, student loans, credit card debt, other personal debt).

2) Create an Annual Budget.

Estimate your monthly income;
Estimate your monthly expenses;
Compare income with expenses and consider your priorities and goals; and
Track your spending.

3) Save for Emergencies.

A good rule of thumb is to have 3 to 6 months of savings to cover your expenses.

4) Save for Retirement and Investing.

If you are still working, review your finances and consider increasing your annual/monthly retirement contributions; and
If you have excess savings and have maxed out your retirement, consider investing in a taxable brokerage account.

5) Set Financial Goals (short-term, mid-term and long-term) – this could coincide with life events such as marriage, divorce, upcoming retirement.

Short-term: paying off credit card debt or saving for emergency fund;
Mid-term: buying a vehicle or paying off student loan debt; and
Long-term: save for retirement, children’s education fund or buying an investment property.

6) Create or Review Your Estate Plan.

7) Re-assess Your Investment Risk Tolerance and Meet With Your Advisor.

The Rikoon Group is here to help you get your financial plan in place. Please reach out to anyone on the team to schedule a meeting to discuss your upcoming life events and financial goals. Together we can assist you in obtaining your 2024 New Year’s financial resolutions.

Staff Updates:

Kyle: The holiday season is always a busy time for me both personally and in the office. James and Johnnie celebrated their fourteenth birthday this December and celebrated with a quick trip to Phoenix to see the Arizona Cardinals play against the San Francisco 49ers. They loved the football game, but I think their favorite part of game may have been the Corgi race that took place at half time. My family started arriving for the holiday season as soon as we got back from our trip and it is almost nonstop through the end of the year after their arrival. To add to the excitement, we remodeled our two guest bathrooms in December and were lucky to finish them only days before we hosted the family Christmas celebrations at our house. I’m looking forward to a good ski season this year.

Rob: This winter has served as my older daughter Robyn’s third trimester and we are waiting for the baby girl’s arrival in early February. Robyn‘s younger sister, Hannah, is soon to be a New Mexico licensed naturopathic physician. Hannah and her partner Grayson are considering making Santa Fe their home. Work continues apace, even in the midst of occasionally very cold weather both here in Santa Fe and in Asheville, North Carolina.

Jeff: This past Fall semester I repeated a class at the community college on using the Logic Pro Music Recording Program and this was very helpful. My granddaughter, Ariah (2 years and 9 months old), is my music director and she is very specific in telling me which songs that she wants me to record for her. On October 1, I hosted a House Concert (sponsored by the Rikoon Group) for an exceptional musician, Jack Williams and it was a wonderful afternoon for everyone that attended. I got to play music with some different groups of friends at a few different places in the Fall. For example, I played at a wine garden event, and I played at a Day of the Dead Music Festival, where they asked us to play the songs of some musicians that passed away this year. I was asked to play songs by David Crosby for the festival and I had 3 other friends that joined in to play and sing some of his rather challenging harmonies with me. I continue to play music sometimes at some of the Senior Centers around Santa Fe where I try to emphasize playing very familiar, popular songs from the 1930s and 1940’s. Through a mutual friend and some fortunate serendipity, I learned that one of my good friends and a music buddy from business graduate school moved to Santa Fe this past year. So, we have been hanging out on Sunday evenings, watching NFL football games, playing some music and also eating some pizza, of course.

Contessa: As we begin 2024, I look back at the past year and reflect on the support and encouragement I received from my family, friends and colleagues throughout the year. I am grateful to everyone who encouraged me to try harder when facing obstacles and be the best version of myself. I hope to inspire my children to work hard, be kind, and always stay humble. They amaze my husband and I as their personalities develop and evolve, and they continue to show signs of goodness in their hearts. This makes me realize now, more than ever, that this is only possible because of the love and support they receive from the community around them which includes their grandparents, teachers, instructors, and friends. There is so much to be thankful for. “Continuous improvement is better than delayed perfection.” – Mark Twain

Keren: My parents moved into an independent living community in September, and I couldn’t have imagined anything better for them. My family spent our first Christmas together with them out of their home of more than 25 years. We shared delicious meals in the dining room at their community, and my son and I played pool there after dinner with my dad. We spent time altogether at the Airbnb I rented playing games, eating all the food we miss here in New Mexico, and going through old family photos. Everything I learned from the Senior Living Solutions webinars we presented has come to bear this year. I am grateful that my parents were able to choose to move at this time, rather than be forced to move due to a major health event. I am grateful for the incredibly kind and committed staff at their community. Most of all, I am grateful to my parents for having worked, saved, and invested enough so that my brother and I are assured they have everything they need to provide for their care through the end of their lives. The work we do as a team each day assisting other families and individuals with their investing and planning means more to me now than ever before.

Gayle: Greetings from the frosty United States; though I miss my home state of North Dakota, I don’t miss 60 below wind chills. Speaking of missing, I have yet to find a New Mexican restaurant in Colorado, that comes close to our Santa Fe cuisine!

I am going to keep my blurb short. Some of you know I recently lost my youngest brother Tom, to cancer at age 57. My other 3 brothers and I would have traded him places, no questions asked. Of course we don’t get those choices in our lives. So please live, enjoy, laugh, love, venture out, experience the world. Because like this blurb, life is short. Blessings to you, Gayle

Anthony: This year my family and I were able to spend the Thanksgiving holiday in Seattle, Washington. My wife’s aunt who lives in Olympia, has been offering to host us for some time and we finally decided to take her up on the offer. It was a nice change of scenery for my daughter and I as we were visiting for the first time. During our week there, we were able to see the Nutcracker at Paramount Theater, tour the Space Needle, visit the famous Pike Place Market, indulge in plenty of fresh seafood, and partake in some new holiday traditions with family and new friends. After a jam packed Thanksgiving, we opted for a quieter version of Christmas visiting family ahead of the holiday. We enjoyed Christmas Day at home in our pajamas, cooking and watching movies all day. Now we look forward to the New Year and all it has in store for us. Cheers to new adventures!

Bonita: In the final months of 2023, my family and I hosted a Halloween themed fundraiser for a family friend who was diagnosed with a Chiari Malformation that seriously affected her quality of life. We were able to raise enough money for her to travel to Barcelona, Spain for treatment and bring her back home where she has been making an incredible recovery. Another health scare took us by surprise when my 19-year-old cousin was in a life-threatening car accident. After 3 months of shuffling between hospitals, my cousin is home and making a miraculous recovery as well. While this is all happening, I was hoping that somehow, I could make it to my best friend’s wedding in Los Angeles. My boyfriend and I rented a Hot Red Convertible Mustang, at the last minute, and made our way to the West Coast. During the holidays, my family has made ornament decorating a new tradition. It’s a fun activity for the kids and leaves us with great mementos for years to come. The adults seem to enjoy the arts and craft session just as much. Considering the bitter-sweet circumstances of 2023, gratitude shined through all my worry. I am reminded of all I have to be thankful for and I look forward to 2024 being a year of intention.

Disclosures:

The Rikoon Group is comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. The Rikoon Group and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. The Rikoon Group and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.

[1] https://insight.factset.com/sp-500-cy-2024-earnings-preview-analysts-expect-double-digit-earnings-growth#:~:text=For%20Q1%202024%20through%20Q3,earnings%20growth%20in%20CY%202024.

[2] Morningstar as of 12/31/23. U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 12/31/23. Past performance does not guarantee or indicate future results.

[3] Is It Good Enough to Fool My Gallerist?, Zachary Small, New York Times, Sep 22, 2023.

[4] Smaller Workforce Is Key to Understanding Future Economic Trends, Dec 20,2023.

[5] Millennials and Gen Z won’t have enough kids to sustain America’s population—and it’s up to immigrants to make up the baby shortfall, Prarthana Prakash, Fortune, January 25, 2023.

[6] Wanted: ‘New Collar’ Workers, Lora Kelley, New York Times, Dec 29, 2023.

[7] What can history teach us about technology and jobs? McKinsey Global Institute, Feb 16, 2018.

[8] forbes.com/health/mind/new-years-resolutions-statistics/