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2023 Year End Review
January 12, 2024
2023 Year-End Review: The Tortoise and The Hare
2023 was a reversal of the equity market underperformance from the previous year. Recall, the S&P 500 and the Nasdaq declined -18% and -32% respectively in 2022. Conversely, they gained +26% and +44% respectively in 2023. The Nasdaq gains was primarily driven by a handful of stocks, aka “the Magnificent Seven”, that drove the Artificial Intelligence frenzy reminding us of “the Four Horsemen” during the Internet Bubble period of the late 1990s. In the end, the S&P 500 Index traded at a similar level last week as it did in early January 2022. Essentially flat over a two-year period!
In the meantime, the US economy had sustained a series of headwinds. Recall, last spring, the financial system witnessed the collapse of Silicon Valley Bank and Signature Bank. This stoked fears about another system failure since the global financial crisis in 2008. In retrospect, the Regional Banking crisis last Spring turned out to be a result of poor balance sheet risk management and a general lack of preparation for higher interest rates.
Additionally, the economy saw the fastest pace of interest rate increases by the Federal Reserve since the 1980s, increasing from almost zero in early 2022 to 5.25-5.50% today.
Historically, housing, employment, and energy prices are key “swing” factors as to whether the US economy gets pushed into a recession or soft-landing scenario. The housing market is solid, the employment picture remains decent and energy prices have declined year over year. Overall, we expect the rate of inflation to continue its downward trend. However, we believe the Federal Reserve may be hesitant to lower interest rates aggressively as market participants believe unless the economy and job market experiences a rapid decline.
Late last year, the equity markets experienced a dramatic rally off the October lows as market participants seemed convinced that a soft-landing economic scenario was inevitable. The S&P 500 Index, Nasdaq, and Russell 2000 Small Cap indices gained 16%, 18%, and 24% respectively off the October 27th lows to finish 2023. Coincidently, market participants were just as convinced that a recession was inevitable late in 2022 as they are now that a soft landing is the most likely scenario today.
History and market experience have taught us that a $26T US economy tends to move a lot slower than a fast-moving equity market trying to express a short-term opinion. The economy tends to move at the speed of a Tortoise while the market wants to move like a Hare. We all know who wins the race in the end!
2024 Outlook
Marty Zweig, famed investor, and market forecaster, coined the phrase “Don’t fight the Fed” in 1970 implying that the Federal Reserve policy has a strong correlation in determining the direction of the economy and ultimately the US stock market. We remind ourselves and clients that this phrase works in both directions of interest rate movement; EVENTUALLY!
As we look forward into 2024, we see little value in trying to predict when and how much the Federal Reserve will cut interest rates this year. Recent economic and inflation data supports the notion that interest rates may have peaked. In other words, the central bank is about to become our friend!
Recall, we titled our Second Quarter 2023 Newsletter: They don’t sound the alarm at the top and they don’t ring the bell at the bottom. In retrospect, we believe the bear market in equities may have ended in October 2022. Additionally, it appears that earnings for the cycle may have troughed in 2Q 2023. Lastly, we believe a new economic cycle will eventually emerge sometime in 2024 or early 2025 marked by improving GDP, PMI, and ISM economic data.
Regardless, we remind investors that we invest with a three- to five-year time horizon utilizing our “Private Equity in the Public Marketplace” approach as we believe this gives us the best chances of identifying industries/sectors where capital is inefficiently allocated and provides the most attractive risk/return opportunities. We believe we are entering a period like the aftermath of the Internet bubble where interest rates peaked, the US Dollar peaked, the US economy experienced a mild recession, and the equity market experienced a multi-year period of strong returns led by small, midcap, and economically sensitive companies.
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.
-Winston Churchill, Former Prime Minister of the United Kingdom
Disclaimer:
Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction. All investment strategies have the potential for profit or loss; changes in investment strategies may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio.
This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to the success or lack of success of any particular investment strategy. All are subject to various factors, including, to general and local economic conditions, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of Oliver Luxxe or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
We are excited to announce that Oliver Luxxe Assets' Senior Research Analyst, Matthew Biedron , has earned a Chartered Financial Analyst (CFA®) designation . This significant accomplishment reflects his dedication to excellence in investment analysis. Matt dedicated over 1,500 hours to study and successfully passed three challenging six-hour exams, all while upholding high standards of ethics, conduct, and work experience in the field. The CFA® designation is widely recognized as the gold standard in finance and demonstrates Matt's commitment to providing the best service to our clients. At Oliver Luxxe Assets, we pride ourselves on delivering customized wealth management solutions based on independent research and analysis for our high-net-worth and institutional clients. Achievements like Matt’s exemplify our mission to maintain a long-term, consistent investment process backed by credentials that reinforce our commitment to expertise and integrity. Please join us in congratulating Matt on his exceptional achievement!
Don’t fight the Fed... It cuts both ways! Year to date, the S&P 500 Index generated a total return of approximately +22% through the end of 3Q 2024. About one-half of this performance was driven by five stocks: Microsoft, Nvidia, Apple, Google, and Meta. This narrow leadership marks a continuation of the “Mag 7” stocks leading the market higher in recent periods. Recall that as the Federal Reserve began raising interest rates in early 2022, investors rotated into large-capitalization technology companies, due to their perceived safety, well capitalized balance sheets, and secular growth opportunities. Since early 2022, the US economy witnessed 11 interest rate hikes and 9 pauses during this 2 ½ year period. As a result of this restrictive monetary policy, economic growth has slowed, the unemployment rate has moved higher, and inflation levels have subsided. Historically, when central banks embark on tighter monetary policies, GDP growth typically slows, corporate profits and margins decline, and overall equity valuations shrink; hence the adage: Don’t Fight the Fed! However, last month, the Federal Reserve lowered the Fed Funds rate by 50 BPS marking a reversal of their recent tight monetary policy. In fact, 30 other central banks across the globe have started cutting interest rates, including the European Central Bank (ECB), the Bank of Canada, and the People’s Bank of China (PBOC). Outside of recessionary periods, this is perhaps the most coordinated monetary-easing cycle globally within the last 25 years. This coordinated easing monetary policy typically leads to accelerated economic growth, including industrial manufacturing, capex growth, and overall corporate earnings. As the title of this Quarterly Newsletter notes: Don’t Fight the Fed….It cuts both ways!
The S&P 500 Index rose double-digits during the first half of 2024. Most of the gains were driven by large-cap technology companies such as Nvidia, Apple, Microsoft, Amazon, and others. Significant capital investments from Hyperscaler companies have powered very strong revenue growth for Artificial Intelligence-related companies. Conversely, consumer-facing markets have begun to experience normalizing growth after a strong period of economic expansion coming out of the COVID period. For example, retail sales in May were tepid for the second consecutive month. We believe the Fed’s rate-hiking cycle and higher inflation may finally be taking their toll on the US consumer. On the flipside, the recent tightness in the US labor market appears to be easing, as the number of unfilled jobs per unemployed person has declined from 2.0 to 1.2 since March of 2022. This dynamic should help alleviate wage pressures and reduce general price inflation in the US from a larger labor pool .
In aggregate, the US economy has remained healthy, driven by a resilient US consumer, declining inflationary headwinds, and still positive GDP growth. Many investors at the start of the year were expecting aggressive interest rate cuts due to a perceived weakening of the economy and softer inflation data as we exited 2023. However, as the first quarter of 2024 unfolded, it appeared that the US was experiencing a second tailwind of growth. For example, the March Manufacturing ISM reading came in at 50.3 versus consensus expecting 48.5, which put the ISM above 50 for the first time since September of 2022.
We're pleased to announce that Oliver Luxxe Assets was named in the Q4 2023 eVestment Brand Awareness Rankings report as a Top 20 Emerging Firm. This is the second consecutive quarter that OLA has ranked in the top 20 of Nasdaq/eVestment's Brand Awareness survey of Emerging Managers. In the report, eVestment ranks the top asset management firms by brand awareness scores for the quarter across multiple global, regional, single product, and asset class categories. Oliver Luxxe Assets is ranked 13th out of 20 leaders in the Global Emerging Managers category. For a link to download the report, click here .
We're pleased to announce that Oliver Luxxe Assets was named in the Q3 2023 eVestment Brand Awareness Rankings report as a Top 20 Emerging Firm.
Early in the third quarter of 2023, there was a continuation of the positive themes seen during much of the year including expectations for a “soft landing” economic scenario underpinned by slowing inflationary trends, a strong labor market, consumer resiliency, and improving corporate earnings. While these themes remained front and center for much of the third quarter, they were increasingly offset with growing concerns about global economic growth and increasing US Federal deficits. In fact, the term “bond vigilante” which was coined in the early 1980s by veteran Wall Street strategist and former Fed Economist Ed Yardeni resurfaced once again in 2023. Yardeni theorized that bond investors were not satisfied with the yields they are receiving for holding longer duration US Treasury bonds due to the risk of persistent inflation and the rising national deficit. As a result, the yield on the 10-year US Treasury bond moved from 3.3% early in the Spring to over 4.7%. We believe this rise in long-term interest rates will aid the Federal Reserve in slowing down the US economy. On the flip side, it increases the likelihood of a recession in 2024 or a potential “credit-accident” in the financial system.
They don’t sound the alarm at the top and they don’t ring the bell at the bottom.
The start of 2023 was a continuation of trends we witnessed in late 2022, as global central banks continued to raise interest rates, economies slowed, and the US consumer remained resilient. Workers are benefiting from a very tight labor market that is providing higher wages and disposable income to middle and lower-income workers. So far, white-collar workers have seen the greatest headwind from a slowing economy, as many technology firms, such as Meta and Google, have reduced staffing levels and future hiring intentions. As a result of increasing interest rates and a slowing macroeconomy, global earnings expectations have been revised lower from decade-highs seen in 2021 and 2022. Higher interest rates pressure asset prices, business investment, consumer spending, and the availability/cost of credit.
March is Women’s History Month, and our team at Oliver Luxxe Assets would like to admire the vital role that women have played in history and our own lives. On this International Women’s Day, we want to celebrate our impactful and entrepreneurial clients and friends by interviewing one of our trail-blazing clients, Andrea Fisher. After working as a successful attorney for many years, Andrea followed her dream of opening her own premier legal recruiting firm, AKF Legal Search Consultants, LLC . We sat down to speak with her about her exciting journey as a female attorney turned business owner. Tell us about your career in law and what ultimately led you to recruiting. I started my career as an attorney in the New York Family Court working with one of the judges. When he was appointed to the Federal Bankruptcy Court, he asked me to move with him as his law clerk, and I became a bankruptcy lawyer. After my first child was born, I left the court to work as a lawyer in a traditional law firm space and did that for over 20 years. In 2014, after dealing with early-stage breast cancer, I decided to take a break from law and used that time to recover and figure out what I wanted to do next. I didn’t want to go back and practice law – I wanted to do something different. I connected with a friend of mine who was a legal recruiter, and she thought recruiting would be a great next career step for me. I’m very outgoing and had a huge circle of friends who were lawyers. Networking and reaching out to people come naturally to me, so it seemed like a perfect fit. My friend was right, and in 2015, I started working at SJL Attorney Search. I absolutely loved recruiting and kicked myself for not doing it earlier! Law often felt isolating to me, and honestly, I did not love to write, and I was a litigator! As a recruiter, I spend every day with my clients, which are law firms, and candidates, who are lawyers looking for career advice or a career move. However, with the onset of the pandemic, law firm recruiting halted. The company I worked for closed, and I had a decision to make: would I join another company or do this on my own? I was suddenly freed from any restrictions, and I felt I had the experience and the connections to open up my own company and do this for myself. In August 2020, I opened up AKF Legal Search Consultants , and the first two years have been incredible . Have you seen law firms change over the years regarding diversity? The law firms I work with have been very focused on diversity, whether it be candidates of color or bringing more women into their firms. I work with a diverse group of candidates, and when I speak with law firms, I ask them how they support diversity so that I steer candidates to firms that are truly invested in promoting that ideal. While I love to work with all candidates, I think female candidates particularly appreciate the perspective I bring to the process. As a working mother of three now-grown children, I know what it’s like to be pulled from so many different directions, and this perspective is valuable in helping candidates figure out what is best for their careers. I try to encourage candidates of all genders to think about how their careers intersect with the rest of their lives. I have open conversations about their childcare responsibilities, what’s important to them regarding how they balance work and life, and more. I’ve made many candidates look deeper and consider their careers from all angles to aid them in making the best decision. Do you have any advice for women who want to start their own businesses or do something different? Don’t be scared. Many people who dismiss the idea of starting their own business do so out of fear or have not done the research or spoken to people who will be integral to their success. Throughout my entire life, I’ve thought about this dream in different phases, and the dream was always there. When I decided to start my own company, a couple of people I knew said, “Wow, I would never have the guts to do that.” I felt it was the right thing to do at that point in my career. I was excited by the prospect of being an entrepreneur and had the right relationships. I knew that I had already established a reputation as a trustworthy and extremely effective recruiter and realized that my clients and candidates were invested in me, not necessarily the name of the company I was associated with, so why shouldn’t that company have my name on it? Recruiting is a commission-based business, so you must be smart about managing your money. Knowing there will be great years and not-as-great years can be scary. Having people like Oliver Luxxe and my accountants act as my support system has been extremely helpful. I run ideas and concerns by them, we talk about the upsides and downsides, and they have helped me work out what my 5 to 10-year outlook should look like. When good people support you and are in constant conversation, you can make better decisions . How has owning your own business improved your life? I love the flexibility that I have. My family loves to travel, and it’s wonderful to be able to do that on my schedule. As long as I have my computer, I can work anywhere. With the success that I have had, I’ve been able to be more philanthropic. I am a founding board member of Impact 100 NYC, a women’s giving circle whose goal is to raise at least $100,000 to give to a New York City organization at the end of the year. Last year we hit over $200,000 and were able to give out two grants and then some. I like being part of an organization where I can see what my donation benefits. I’m also involved with my synagogue, Congregation Rodeph Sholom, and co-chair one of the committees. Of course, like so many New Yorkers, we got a pandemic puppy. Just as my last child was about to leave the nest, we thought, why not fill that empty space with a dog? My husband and I love Otis. Working from home, I appreciate the fact that he makes me get out of my apartment to walk him throughout the day! Through him, I meet a lot of dog owners, and in some cases, I even make a business connection!
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