Quarterly Commentary: Fourth Quarter


Markets ended 2023 on a high note, rebounding nicely after a disappointing third quarter. The year was certainly not without its challenges, including the steepest borrowing costs in over 20 years, a regional banking crisis, and escalating geopolitical turbulence. However, a trend toward lower inflation, the Federal Reserve’s surprisingly dovish pivot in its December meeting, and mounting enthusiasm around artificial intelligence (AI) outweighed these challenges, pushing virtually all asset classes into positive territory for the year.

Name4th Quarter (10/01/23-12/31/23)3rd Quarter (07/01/23-9/30/23)Year-to-date (01/01/23-09/30/23)1 Year (10/1/22-9/30/23)
S&P 500 Index11.7%-3.3%13.1%21.6%
Russell 2000 Index14.0%-5.1%2.5%8.9%
MSCI EAFE Index10.4%-4.1%7.1%25.7%
MSCI Emerging Markets Index7.9%-2.9%1.8%11.7%
Bloomberg US Aggregate Bond Index6.8%-3.2%-1.2%0.6%
For informational purposes only
Source: YCharts

Real estate (Dow Jones US Real Estate Index) led the major indices in the fourth quarter, and small-cap stocks (Russell 2000 Index) rebounded significantly off recent lows. The S&P 500 Index and the developed international stock index (MSCI EAFE Index) were both up double digits for the quarter while emerging markets (MSCI Emerging Markets Index) gains were more modest. Meanwhile, bonds (Bloomberg US Aggregate Bond Index) rallied in tandem with stocks for the quarter in response to the markets ‘newfound confidence that we have seen the last of the Fed rate hikes.

Investment Themes in 2023

As we look back on 2023, we would like to highlight a few investment themes that bear discussion; two around market concentration/participation and one around continuing Fed action.

Investment Themes in 2023

In a recent commentary, we discussed the dynamics around a handful of technology stocks (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) in the S&P 500 dubbed “The Magnificent Seven.” As 2023 came to a close, these stocks remained in the news, accounting for roughly 85% of the return in the S&P 500 index for the year. The other 15 stocks accounted for only 15% of the total return.

Much like we witnessed in the late 90s with the internet craze, excitement around the emergence of AI has caused the S&P 500 to be highly concentrated in these names and has pushed their valuations to significant premiums over their 25-year averages. This is in stark contrast to 2022 where they had a decidedly negative impact on the S&P 500 index. The extreme volatility of this group is evident in the range of returns over the two years between -29.5% (Tesla) and 68.6% (Nvidia). While the Magnificent 7 had a stellar year it came on the heels of a 39% decline in 2022.

The following chart shows the path of these stocks relative to the rest of the holdings of the S&P over the two-year period.

While we observed the outsized returns of this small group of stocks in 2023, it is notable that in the fourth quarter, performance was more evenly distributed among other areas of the equity markets with more reasonable valuations. Going forward, we continue to see opportunities in this broadening across other equity assets and market capitalization, and we are positioned to take advantage of these trends supporting our long-term methodology.

The Decline of the Public Company

We have been following another trend in the equity marketplace for quite some time, which may prove to be impactful, especially for average investors. In 1996, there were more than 8,000 publicly traded firms in the U.S. stock market, allowing companies access to capital markets and investors an opportunity to participate in the success of these companies. Since then, our economy has grown substantially and our population has increased by 70 million people. It would follow that the number of listed stocks would have increased proportionally, but that has not been the case. As it stands today, fewer than 4,000 publicly traded firms exist in the marketplace. There are three reasons for this gradual decline- mergers & acquisitions (M&A), regulatory reform, and the emergence of private equity.

The number of M&A deals fluctuates in a given year depending on the availability of capital and the state of various sectors of the economy. There are also anti-trust laws in place to prevent monopolies. Regardless, the net effect of M&A activity has been consolidation. For example, in 2023, Kroger proposed an acquisition of Albertsons, L3Harris acquired Aerojet Rocketdyne, Amgen acquired Horizon Therapeutics, and Broadcom acquired VMWare to name a few. Interestingly, this activity occurred across a variety of market sectors.

Regulatory compliance is another challenge for companies considering the public market. Regulations were originally put in place after the market crash of 1929 to provide transparency and disclosure to shareholders. These regulations have ebbed and flowed over different administrations and economic cycles, but recent legislation like Sarbanes Oxley Act after the dot com bust, and others after the Great Recession have significantly increased the cost of doing business on U.S exchanges.

Along the way, private equity (ownership or interest in an entity that is not publicly listed or traded), has emerged as a formidable alternative to the public market. Private equity can take shape in many forms, allowing investors to build equity in private companies without the scrutiny, added costs, or transparency of the public market. As a result, private equity has grown from 4% of U.S. corporate equity to over 20% over the last several years.

What does this mean for investors? The public market has allowed for the democratization of stock ownership giving average investors the ability to participate in wealth-building through the capital growth of these public companies. It does so with easy access through stock exchanges and very low minimums. Conversely, private equity has limited accessibility and high minimums, putting it out of the reach of the average investor.

If these trends in M&A, regulation, and private equity continue, it could diminish the public’s ability to participate in equity ownership. Further, the lack of transparency and governance of private equity could cause additional dislocations in the market and the economy that would be difficult to anticipate. The SEC is certainly aware of these issues, and we suspect that they will ultimately take steps to ensure continued access to equities for the general public. In the meantime, we will continue to facilitate our client’s participation in publicly traded equities as a part of our investment strategy.

The Fed Pivots

While the Fed was quite active in 2023, the Fed Chair Powell surprised the markets at the mid-December policy meeting by subtly implying they are pivoting away from their “wait and see” approach to a debate on the pace of cuts in 2024. The Fed’s latest “dot plot”, the committee’s individual attempts to predict the path of rates, showed the likelihood of 75 bps of cuts this year. While this is good news relative to recent hikes, bond market pundits came into 2024 anticipating as many as six cuts.

The more important issue for the markets is the Fed’s rationale behind these rate cuts if/when they materialize. If the economy stays relatively strong, and inflation numbers continue to decline, cutting rates would simply normalize real rates of return, which would be welcomed by the markets. If the Fed lowers rates in response to an unanticipated decline in economic activity, we feel this would be a sign the Fed went too far with their prior restrictive policy and the markets would frown on this news.

Ringing in the New Year

As we enter 2024, we remain cautiously optimistic our economy will remain resilient while gaining momentum from a more dovish Federal Reserve. We are mindful of the many challenges we face this year from geopolitical unrest in many areas of the world, continued fiscal pressures, and a highly impactful election year with over 50 countries and half the world’s population holding national elections.

The economy and markets are cyclical and have experienced periods of prosperity and decline, with a long-term tendency towards prosperity. We also know that the precise timing of these cycles cannot be predicted with any consistency or accuracy. While economic and market statistics are ever-changing, we feel history is the best guide we have to educate us on the volatility that is inherent in investing. The issues of today always seem more looming than those in the rear-view mirror. Yet, regardless of the issues we will face, our fundamental principles of investing still apply. Diversification, the relationship between risk and reward, and the power of time are central tenets of successful investing that are rooted in the very heart of free markets and capitalism.

We wish you a healthy, prosperous New Year!

Thank you for your continued confidence in our services.

– The Wealth Dimensions Team

The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in 
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
Sources include:  The Atlantic, The Secretive Industry Devouring the U.S. Economy by Rogé Karma on October 30, 2023
The MarketWatch, Dow Jones, November 18, 2023
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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