Topic: Wealth Planning

Market performance in 2023 marked a significant change from 2022, with almost every asset class outperforming the prior year. Both stocks and bonds rallied in November and December after a rough stretch from August to October. Through the first three quarters, bonds were down for the year but then posted their best quarter in more than 20 years in the fourth quarter.

U.S. large-cap stocks, led by the Magnificent Seven, outperformed all asset classes last year. Small-cap stocks made a year-end run after the Fed announced that it was probably finished raising rates and anticipating three rate cuts in 2024. Small-cap stocks had been hit hard earlier in the year following the Silicon Valley Bank crisis. Energy stocks finished the year flat after being the only positive sector in 2022, and Chinese equities pulled up the rear, being the only major asset class to finish in the red.

Each year there are defining themes that dominate the markets. In 2020, it was the global pandemic, which in turn caused the supply chain issues of 2021. In 2022, it was all about inflation. Last year, as we wrote often, it was the emergence of artificial intelligence.

Some of these market and economic themes can be positive while others are negative. As one theme gives way to another, it is important to remember not to get distracted by the narratives and to stick with the investment plan.

We cannot predict what theme will dominate the markets in 2024. The presidential election will be a likely candidate, but the markets historically have done a great job ignoring the election concerns that cause many investors to fret.

Key Themes in the Market by Year

Number of mentions in earnings call transcripts of Russell 3000 companies

This will be no ordinary election year. The below chart played out well last year, during the third year of the presidential cycle. With 2023 ending so strong, we would not be surprised to see a pause in equity markets to start the year and continue the trend of a weak first quarter during the fourth year of the presidential cycle, followed by strength the rest of the year. 

Q1 of an Election Year Tends To Be Weak

S&P 500 quarterly performance by presidential cycle (1950-2023)

As we recently wrote, we see many reasons to be bullish in 2024: 

1. Inflation continues to show signs of moderating to the Fed target of 2%.

2. Interest rates are normalizing. We expect bond yields to decline in line with falling inflation and slower economic growth. This year, we saw the 10-year Treasury span a huge range from as low as 3.25% in April to as high as 5.02% in October.

3. Consumers appear to have plenty of disposable money in their pockets. Consumer spending should grow more slowly as job gains dimmish. However, on aggregate, consumer financial conditions are nowhere near levels before the great financial crisis.

4. Household wealth and liquidity remain robust.

5. The U.S. government has committed more than $1.4 trillion for capital projects. This has the potential to reshape U.S. manufacturing and energy, and boost the semiconductor industry.

6. Economists expect corporate earnings for companies in the S&P 500 to grow by double digits in 2024. Increased earnings could provide a runway for stocks to head higher.

7. Almost $6 trillion of cash remains on the sidelines. Soaring yields in 2023 pulled cash into money market funds and other short-term instruments, such as Treasury bills and CDs. Lower rates in 2024 could force investors to move money into equities and longer-duration bonds to earn a higher rate of return as cash yields fall.

8. Artificial intelligence captured investors’ hearts last year and contributed to the outperformance of stocks led by the Magnificent Seven. AI applications are spawning innovation across many industries, not just in technology companies.

9. Presidential election years have been good for stocks. There is a tendency for investors to worry about elections (which could prove especially true for the upcoming election), but from a market perspective, that worry hasn’t had much of an impact. Going back to 1952, the stock market has declined just three times in a presidential election year.  In re-election years, the S&P 500 has not declined since 1948.  

It is good to remember that the average peak-to-trough correction per year is 14.2% since 1980 for the S&P 500. 

In 2023, stocks had a 10.3% correction, but finished the year up more than 24%. Even strong years have a correction where the market declines by 10% or more, and it is very rare for the market not to have at least a 5% pullback at some point in a year. 

Stocks Go Up and Down, and 2024 Won’t Be Any Different

S&P 500 Index max pullback per calendar year

Remember, much of what we read and hear on the news are market predictions for what economists and analysts think is going to happen. It seems like a long time ago, but at the beginning of 2022, the top 15 Wall Street firms predicted on average that the S&P 500 would finish at 4,950 (from a high of 5,330 to a low of 4,400) and the S&P 500 finished 2022 at 3,839 — a far cry from the prediction. The same analysts last year predicted on average that the S&P would finish 2023 at 4,100 (a high of 4,500 to a low of 3,725). The S&P closed 2023 at 4,769, a gain of over 24%.

For 2024, Wall Street economists see the S&P finishing anywhere from as low 3,300 to as high as 5,400. That is a 2,100-point spread!

At the end of the day, these are predictions, and no one knows for sure how this year will play out. What we do know is that over time, markets tend to rise and staying invested is the best strategy. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: Business Insider, Carson, Goldman Sachs, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

One of the biggest financial storylines in 2023 was the performance of the market itself: Stocks bounced back from a difficult 2022, and though the ride wasn’t always smooth, those who stayed invested were rewarded for doing so.

Throughout the year, a number of different market themes arose — and as often is the case, some themes repeated themselves often.

ChatGPT and AI

As of January 2023, ChatGPT was the fastest-growing consumer software application in history. It is credited with starting the boom in artificial intelligence, as AI became the biggest market buzzword for the year. It seems inevitable that it will play an increasingly important role in the future economy, and investors appear to recognize the market is still in the early stages of an AI boom.

The Magnificent Seven

Investors loved the biggest stocks in the market, the mega-cap tech companies: Apple, Amazon, Alphabet (Google), Meta (Facebook), Microsoft, Nvidia and Tesla. All seven stocks have more than doubled the performance of the S&P 500.

Magnificent Seven Stock Performance

Banking crisis

U.S. regional bank stocks plummeted in early March after federal regulators shut down Silicon Valley Bank, the largest bank failure since the 2008 financial crisis. 

U.S. credit rating downgrade

Fitch, one of the three main credit rating agencies, downgraded the U.S. long-term credit rating to AA+ from AAA. Moody’s lowered its outlook to negative, as confidence in the U.S. government to navigate shutdowns and increased spending continued to wane.

Inflation

The Federal Reserve continued to raise interest rates in the first half of 2023. Investors finally saw signs that the Fed’s monetary policy tightening was paying off, as inflation started to decrease. CPI decreased from the peak of 9.1% in June of 2022 to 3.1% as of November 2023.

Interest rates

The Fed’s “higher rates for longer” position replaced “Don’t fight the Fed.” The Fed raised interest rates four times during 2023, the last of which was in July. At the last Fed meeting, Chairman Jerome Powell hinted that the Fed may cut interest rates at least three times next year.

Recession — yes or no?

This continues to be a heavily debated topic by Wall Street economists. If we have a recession, can the Fed engineer a “soft landing” or will it continue to be a series of rolling recessions by sector? 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: Morningstar

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.

Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Santa Claus stock market rally came a little early this year. Last week, the Federal Reserve left interest rates unchanged and signaled the end of the hike cycle. The Fed acknowledged that inflation is easing faster than expected and that several Fed members favor cutting interest rates in the first half of 2024. The Fed’s statement also acknowledged that the pace of economic activity is slowing.

Bond yields fell on the news, and the stock market rallied. Fed Chairman Jerome Powell emphasized that the risk of not doing enough to curb inflation is now balanced with the risk of holding rates too high for too long and in turn, potentially breaking the economy in the process. As seen in the chart below, before the Fed announcement, the market wasn’t expecting an interest rate cut before the third quarter of 2024 — and now, following last week’s Fed meeting, as many as six rate cuts are being priced in next year.

Markets Expect 6 Rate Cuts in 2024

There are plenty of reasons we believe in being bullish as we head into 2024:

1. Inflation continues to show signs of moderating to the Fed’s target of 2%.

2. Interest rates are normalizing. We expect bond yields to decline in line with falling inflation and slower economic growth. This year, we saw the 10-year Treasury span a huge range from as low as 3.25% in April to as high as 5.02% in October.

3. Consumers appear to have plenty of disposable money in their pockets. Consumer spending should grow more slowly as job gains diminish, but on aggregate, financial conditions are nowhere near levels before the great financial crisis.

4. Household wealth and liquidity remain robust.

5. The U.S. government has committed more than $1.4 trillion for capital projects. This has the potential to reshape U.S. manufacturing and energy — and boost the semiconductor industry.

6. Economists are expecting corporate earnings for companies in the S&P 500 to grow by double digits in 2024. Increased earnings could provide a runway for stocks to head higher.

7. Almost $6 trillion of cash remains on the sidelines. Soaring yields in 2023 pulled cash into money market funds and other short-term instruments, such as Treasury bills and CDs. Lower rates in 2024 could force investors to move money into equities and longer-duration bonds to earn a higher rate of return as cash yields fall.

8. Artificial intelligence captured investors’ hearts this year and contributed to the outperformance of stocks led by the Magnificent Seven stocks. AI applications are spawning innovation across many industries, not just in technology companies.

9. Presidential election years have been very good for stocks. There is a tendency among investors to worry about elections — especially now. But going back to 1952, the stock market has declined only three times in a presidential election year. In re-election years, the S&P 500 has not declined since 1948.

S&P 500 Performance Has Been Positive in Most Presidential Election Years Since 1952

Markets do not go up in a straight line, and we expect volatility to continue in 2024. Over the last five years, we have experienced two bear markets, a worldwide pandemic, high inflation and surging interest rates. All the while, the S&P 500 has doubled during this time.

The market hit an all-time high in early 2022, only to see equities and bonds fall precipitously, with both asset classes ending 2022 down big. In 2023, we saw a sharp reversal, led by the Magnificent Seven: Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. The S&P 500 is closing in on a new all-time high as we near the end of 2023.

We have referred to the below chart before: On average, there has been at least one 10% market correction each year since 1950, and there is no reason to think that 2024 will be any different.

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Inflation, Fed policy, artificial intelligence and the Magnificent Seven dominated the market headlines in 2023. Those same topics, along with the upcoming presidential election, will be top of mind as we head into 2024. But over the long term, returns are driven by fundamentals and not the latest noise.

In the year ahead, it will be critical to remember that there are things in your control and things out of your control. Spending time and energy on the things you can control will make it easier to withstand any potential headwinds that may occur. 

We look forward to the challenges and opportunities that lie ahead, and we look forward to guiding you through the upcoming year.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Baird, Carson, FS Investments, JP Morgan, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The stock and bond markets continue to hinge on the Federal Reserve’s battle against inflation. From September to October, inflation remained flat, as tracked by Consumer Price Index (CPI). This report came as gasoline prices fell 5% for the month, which in turns means that households have more money to spend. 

CPI, which measures a broad basket of goods and services and is a key barometer for tracking and measuring inflation, increased 3.2% from a year ago. The chart below shows price changes for core categories year over year. 

What’s not in the chart is shelter, which is the average household’s biggest expense. This has accounted for more than 70% of the total year-over-year increase in CPI. Most inflationary pressures still stem from the pandemic and the imbalance between supply and demand. 

Inflation Breakdown for October 2023

These are some of the core categories, plus other items with notable year-over-year price changes.

Supply chains were totally thrown off during the pandemic, driving up prices for goods at the same time consumers were flush with cash. Since then, supply chains have returned to normal, but it takes time for prices to ease. The annual level is the lowest in two years but still above the Fed’s 2% tracking level. Both the stock and bond markets are sending signals that the Fed is through raising rates, but the data continues to send conflicting signals. 

Last week, Fed Chairman Jerome Powell said the Fed remains unconvinced that it has done enough to get inflation down to the 2% annual rate and won’t hesitate to raise rates if needed. Uncertainty remains over how long the Fed will keep the benchmark rate at its current levels. 

After we saw the best week of the year for stocks two weeks ago, the market continued to show strength last week with another strong market return. Following the release of the CPI number on Tuesday, the stock and bond markets rallied. If inflation remains on a sustainable path lower, the Fed may cut rates sooner than expected in 2024.

If the Fed were to cut interest rates earlier than expected, we could see the stock market trend higher. With 2024 being an election year, the Fed probably will tread lightly so as not to influence the vote. An interesting side note: For the last 10 new presidents, stocks have been higher during an election year, with an average return of 12.2%.

Stocks Have Never Been Lower in an Election Year Under a New President

S&P 500 performance under new presidents (1950-current)

We understand that elections can cause anxiety over who may win and what may happen. Elections can impact the economy and the markets based on each candidate’s proposals, but it is far too early to outline what that may look like. What we must keep in mind is that the economy has continued to grow throughout every presidency in our nation’s history. 

Market volatility may increase because we don’t know who will be in the White House, but stocks tend to forge ahead as uncertainty fades. Elections seem like a big deal in the moment, but historically they have had little bearing on what paths the economy and the market ultimately will take.

The U.S. Economy Has Continued to Grow Regardless of Who Is in the White House

U.S. Nominal Gross Domestic Product (GDP), USD billions

We will continue to beat the drum next year to remind our clients that what matters most is the macro economy, not who may or may not win the election. Evidence is becoming clearer that the economy will avoid a hard recession — and may avoid a recession altogether. That does not mean that there are not risks, especially with the conflict in the Middle East and Ukraine, but regardless of which way the election swings, opportunities are always present.

Based on the likely scenario that the Fed is through with rate hikes, the most readily apparent consideration is that yields typically fall soon after. This means that cash will carry reinvestment rate risk. In other words, when the Fed begins to lower rates, money market rates will drop as well. If you are waiting to deploy cash due to higher money market rates, know that it may be too late to put that money to work into either stocks or bonds once the Fed cuts rates.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, CNBC, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The Federal Reserve kept the benchmark Federal Funds Rate unchanged for the second meeting in a row. As we wrote last week, Treasury yields have risen sharply since September. Longer maturity bonds had taken the brunt of the pain over the last few months, as the 10-year Treasury briefly eclipsed the 5% level, which had not been seen since 2007.

Along with the pain in the bond market, the stock market experienced a correction with stocks down more than 10% from their recent peak. Investors may still have some PTSD from 2022, when both stocks and bonds were down at the same time, but that was a rare occurrence. 

Market corrections are normal. There have been corrections in 22 of the past 44 years, and according to Ned Davis research, there are 1.1 corrections per year on average going back to 1950. This suggests that the market falling 10% or more in a year is a normal occurrence, but each time it happens, the occurrence feels unique.

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Last week, the stock and bond markets rallied after the Fed announcement and the weaker-than-expected payroll report, which limited concerns of a recession. The 10-year Treasury bond yield fell to almost 4.5%, well off the recent 5% yield reached two weeks ago. As bond yields fell, stocks surged, marking the best week of the year.

Historically, November and December have been strong months in the market, and November has been the best month of the year, gaining 1.7% on average. The strength in the month of November may be tied to the fact that August, September and October have historically been the weakest three-month stretch of the year. Another interesting tidbit: December has been strong in pre-election years, which is the case this year as we head into 2024.

November Is the Best Month of the Year

S&P 500 Index average monthly returns (1950-2022)

From a portfolio management perspective, we continue to look ahead. The markets are forward-looking, often telling us what may happen ahead of time. We continue to watch and wait for the most anticipated recession in history. Inflation continues to show signs of weakening but remains persistently — and stubbornly — above the targeted 2% level.

With an eye on the future, we are making the following portfolio changes as we end the year:

1. Through the end of October, only two sectors had positive year-to-date returns: technology and consumer discretionary. Every other sector was negative. The “Magnificent Seven” tech stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — were the main reason the S&P 500 had a positive return through October. The broadening of the market away from those seven names had yet to materialize. 

Healthcare, which historically has been a sector to own in a struggling economy, has been underperforming over the last several years. This is partly due to pressures on drug pricing as well as higher interest rates hurting less profitable companies in the faster-growing biotechnology space. We have decided to reduce our exposure to healthcare and move those monies to a holding that focuses on companies that display positive fundamentals: return on equity, stable earnings growth and lower financial leverage.

2. We have continued to increase the duration of the fixed-income portfolio as interest rates have continued to climb. The longer-dated maturities at the end of the yield curve are more volatile than the short end of the yield curve.

For example, in the chart below, let’s start by looking at the 5-Year Treasury row and the 0-bps column (4.58%). If interest rates were to rise by 100 basis points (1%), you would theoretically earn 1.08% over that time frame. However, if interest rates dropped by 50 basis points (.50%) in the next year, you would earn 6.39% in total.

By comparison, let’s look at the 10-year Treasury bond, a longer maturity bond than the 5-year Treasury. If rates were to rise by 1%, you would lose 2.64%; if rates were to fall by .5%, the potential rate of return would be 8.25%. Because we believe we are near the end of the Fed rate increases, we are continuing to extend the duration of the portfolio and increase the credit quality by adding a position in longer-dated Treasuries. We believe that when rates fall, we will be able to capture nice income along with capital appreciation from rising bond prices.

Interest Rate Scenario Analysis

This analysis illustrates the total return of the U.S. Treasury security of a set maturity, over a given time period and a range of interest rate shifts.

We continue to reposition the portfolio in response to where we think the puck is moving. The world in which interest rates stay higher for longer is not one we have been accustomed to for the last 15 years. Financial markets, both stocks and bonds, may be more volatile in response.

With higher yields for longer periods, investors are being compensated in cash through money market and CDs. However, as soon as the Fed lowers the Federal Funds Rate, we will see those yields fall rapidly. We think much of the pain from rising interest rates is behind us, and the key to navigating volatility still is to be in a diversified portfolio. We will continue to monitor the portfolio and make changes to skate toward the puck, rather than wait for the puck to come to us.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Carson, CNBC, Ned Davis, Wealth of Common Sense

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.