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History Doesn't Repeat Itself, But It Often Rhymes

History Doesn't Repeat Itself, But It Often Rhymes

December 23, 2023

“History doesn’t repeat itself, but it rhymes” is a good quote for the end of the year, I think. Especially, as it pertains to the predictions of many economists and market strategists, and the performance of the financial markets. The end of the year always brings a flurry of predictions for the outcome of the market for the following year, usually accompanied by a target for the S&P 500. Most will be wrong – every year most are wrong.

Last year, almost every market strategist called for the market to be only slightly positive, predicting that high inflation, a tightening Federal Reserve, slow growth, stagflation, war, energy costs, supply chains, etc. would limit the upside to the market. I don’t blame them. I was pretty pessimistic at the end of the year last year, and I consider myself to be a pretty optimistic guy. It was pretty hard to be optimistic at the end of 2022 after getting the snot kicked out of me by both the stock market and the bond market all year.

Let’s review some of the news headlines that could have brought the markets to their knees this year:

  • Regional banking crisis (this one could have been a doozy)
  • US/China tensions
  • Russia/Ukraine war
  • Inflation re-acceleration (you’ll probably keep hearing about this one for a while longer)
  • Federal Reserve overtightening (this one, too)
  • US economy slowing/recession fears
  • US economy growing too fast (have to love irony)
  • Washington DC dysfunction (always seems to be the case)
  • Israel/Hamas war
  • Dollar will lose its dominance
  • US debt downgrade
  • Global economies unloading US debt
  • I can go on and on…

While some of the headlines above did manage to put a pause on the market for a short time, none of them were enough to kill the market’s upward momentum. One can say the market pushed forward despite all the bad news because of luck, irrational exuberance with AI, or hedge funds manipulating the system, but I don’t think that’s it.

The US economy is a service-led economy. It grows because we love buying things and having experiences. As long as we have money in our pockets, we’ll figure out a way to spend it. And if we run out of money, we’ll borrow it for a while to keep the good times rolling for a bit longer (not necessarily a good thing). The baby boomer generation is reaching 65 years of age right now, and they are very active and enjoy experiencing life. They also have healthy investment accounts due to decades of positive market returns. Add in a healthy job market and real wage gains, and we have a recipe for continued consumer spending.

The US is experiencing an onshoring boom if you will. The pandemic pointed out many fragilities in our supply chains and companies want to diversify their manufacturing locations to prevent such disruptions in the future. Given we live in a heightened geo-political tensioned world, it only seems prudent. With that being said, the federal government is allocating resources to expand our manufacturing abilities here and companies are also investing heavily in US manufacturing capabilities. All that investment will funnel itself into our economy. While the major effects of such investments won’t be felt until the future, we can see how companies are investing those dollars now, and that provides optimism.

For all the bad news that was shared this year thanks to the never-ending news cycle, it was easy to miss that S&P 500 earnings turned out better than originally expected. Earlier in the year, analysts believed higher borrowing costs would lead to much lower profits than what was realized. It didn’t turn out so bad because US companies have done a good job of running efficiently. They tightened their belts where they could over the years (memories of 2008, a pandemic, and a rate hiking cycle have created lean companies) and technology has allowed them to squeeze more productivity out of employees.

There are more reasons why this year didn’t turn out to be as bad as it could have been, but I’ll only give you one more. The US is still the place where everyone wants to go. Despite all our problems, the middle school maturity level of our politicians, socio-economic issues, etc., we are the nicest house on the ugliest block. There’s a reason why so many immigrants flock here every year to start a new life, and why we have the most innovative companies on Earth. As long as we continue to value hard work and are willing to take risks, we should continue to be the beacon on the hill.

This isn’t to say that there aren’t risks out there. The reason why so many strategists get predictions wrong isn’t because they’re dumb: quite the contrary, they are some of the most intelligent people on Earth. Outside of the obvious reason that it’s just impossible to predict something as complicated and multi-dimensional as the global economy in any given year, I think it’s because we are trained to look for and home in on risks wherever they may lurk – both as a human species for survival reasons, but also as asset managers that are responsible for people’s retirement and life savings.

Most of the news headlines I mentioned at the top of this article are risks we’re going to face in 2024 (especially Washington DC dysfunction). At the end of the day, however, money has to flow somewhere – it always does. Investment institutions aren’t happy with having money sit in cash, and right now there is a ton of it. The Federal Reserve may decrease rates in the middle of the year next year, and the robust interest rates everyone enjoyed in 2023 will start to decline. Pension funds, investment funds, government funds, etc. need to aim for a certain return every year, and the interest rates earned in cash products will not cut it.

In the past, the S&P 500 has been up almost 70% of the time in any given calendar year since 1928. It has also been up greater than 10%, more than 50% of the time. Are there years where the market loses? Yes, certainly. Are there years when the market loses big? Absolutely. That’s why we’re always asking about risk tolerance. But by and large, I believe the odds are in our favor.

So, here’s my take: We have a favorable economic backdrop as of now (that can change), we live in the best country on the planet (I pray that doesn’t ever change), and based on past statistics, probability is in our favor (this would take longer to change). I am cautiously optimistic that 2024 will be a good year. I’ll send another note out soon outlining how we are positioned for the year, but I have blabbed on long enough. For now, I wish you nothing but good tidings for the holiday season. Thank you and happy holidays!


S&P 500 Historical Returns


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.