Financial markets performed extremely well over 2023 despite economic headwinds and a widely expected recession. The 4th quarter saw exceptional returns in all asset types other than commodities. The table below shows returns for investable ETFs representing the most common investment types. We like to use ETFs versus indices to evaluate returns as they include transaction cost and fees while indices do not. In this update we will examine the performance of each major investment type through December 31, 2023.
Stocks
Large company U.S. stocks, particularly technology-oriented stocks, were up substantially in the fourth quarter and for the year. Large cap stocks had a 26.2% return in 2023 more than double typical average returns. This was fueled by signals the Fed was done with interest rate hikes and expectations of the impact of artificial intelligence on technology company profits. International stocks were not too far behind at just over 20% return. Value oriented stocks were up 9.3% for the year based on value indices, which contain many companies which deserve a low valuation rather than true value stocks. Looking at fundamentally weighted indices, which in my view are a better gauge of active value investing, value stocks were up about 18.2%. Smaller company stocks were up 16.8%.
Bonds
The bond market overall was also fared relatively well in 2023 with a total return of 5.7%. BND represents the broad bond market including bonds of all maturities. Intermediate and short-term maturity bonds were up 4.3%.
Alternative Investments
Alternative investments can include real estate, commodities, private capital and a variety of other investments. Here we include two traded ETFs representing real estate (VNQ) and commodities (DBC). Real estate was up 11.8% in 2023 while commodities were down 6.2%.
Diversified Portfolio
There are some iShares ETFS representing different levels of diversification from about 40% stocks and 60% bonds to 80% stocks and 20% bonds. Most diversified investors have portfolios with between 60% and 80% stocks depending on their ability and willingness to take risk. These diversified portfolios were all up nicely for the year given the strong performance of most investment types noted above.
Looking Forward
Thus far the Federal Open Market Committee has managed to slow the economy down by raising interest rates without pushing the economy into a recession. Risk remains that they could go to far or that other events might cause a U.S. or global recession. Overall stocks are also priced at a high level relative to history. I would therefore expect more modest stock returns over the coming years with continued volatility. The bond yield curve (see US Treasury Yield Curve) remains inverted with the best yields available for short-term bonds. At some point there will be more attractive opportunities for intermediate term bonds, but not yet in our view.