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Quick 2023 Stock Market Recap:

• After a 7% S&P bump in January, there was still extreme negative sentiment after a tumultuous 2022. Notably, the 50-day moving average crossed the 200-day moving average right as January ended.

• The S&P then pulled back about 8% from February to mid-March as the “mini banking crisis” began to unfold. Oddly enough the 100-day moving average crossed the 200-day moving average on 3/10 (the exact day that marked a near term bottom).

• A few financial institutions (most notably First Republic which was bought by JP Morgan and Silicon Valley Bank) quickly became insolvent and measures were taken to accommodate the situation. Liquidity was pumped into the system, and the federal reserve balance sheet took a steep rise. FDIC guaranteed deposits, and an implicit fed put gained steam in the psychology of market participants.

• The market rallied once fears of a cascading banking crisis were absolved. The S&P ran up 10% from mid-March until the end of May. By the end of May, the Federal Reserve balance sheet dwindled back down to the level it was before accommodative action was taken. In addition, Nvidia had their banner earnings report that provided a catalyst for further upside in the market. This was the beginning of the AI hype train.

• As we flipped the calendar to June, AI was all anyone could talk about. Energy (the leading sector in 2022) was down 10% as the S&P rose 10%. Furthermore, at this time we had run up 20% from the October 2022 low in the S&P. It still seemed that sentiment was muted as typically this is the sign of a new bull market. However, nearly everyone was reluctant to subscribe to the idea that a new bull market had just began.

• From the start of June to the end of August the S&P tacked on another 5.5% as AI and the newly minted “Magnificent 7” (Apple, Amazon, Meta, Netflix, Tesla, Google, Nvidia) led the indices. While under the hood, many stocks were not performing well, fears of a pullback began to mount and market breadth alarmed market participants.

• Right on queue, we got a nasty 10% correction from the beginning of September to the end of October. The S&P quickly fell below 4200, which was a key level many were watching as support. At the end of October, the S&P was only up 5% YTD after all the AI summer exuberance.  

• Boom, like a coiled spring we ran a staggering 16% from the beginning of November until the end of the year. A truly incredible rally that converted most skeptics to believers. When all set and done the S&P rose approximately 23% in 2023; right in the face of a litany of strategist who all predicted a recession in 2023.

2023 Reflection Points:

• It is important to consider market sentiment as a counter indicator when at extremes. After a gut check in 2022, it was very difficult to see how 2023 would be any different. Most everyone was bearish coming into 2023. Quite like the way sentiment is now bullish coming into 2024.

• S&P 500 companies are the cream of the crop. These publicly traded companies are the best in the world at protecting their margins and creating shareholder value.

• Never underestimate the American consumer’s want and ability to spend money.

• The Magnificent 7 are generally not impacted by rates. They generate so much free cash flow and have capacity that they can thrive regardless of the rate environment.

• Investing is easy in hindsight. During 2022, it did not feel good to put money into the market. Even during the mini banking crisis of 2023, the fear was palpable especially coming off the 2022 bear market. It helps to operate with a long-term mindset.

• Markets have trends that take time to develop, and the trend is usually your friend. I want to focus on riding waves and adding to strength more moving forward (like I did with NFLX today after its huge Q4 earnings report).

• Gaps in charts can be informative. When Nvidia gapped up at the end of May, some figured it would immediately give it up and fill the gap. Others wanted to add to strength. I recall learning in my textbook that a gap up is usually a sign of further upside to come. We know what the correct decision was now. While it is likely that all gaps eventually get filled, the timeframe of that occurring could be way longer than anyone can imagine. It could take decades for that May Nvidia gap to fill (we simply do not know).

• Sell in the Summer to raise cash for the World Series. This is now 2 years in a row where the best time to buy stocks was during the World Series. I can’t remember who said it, but an old-timer on CNBC once said that was his secret for years in the industry. It has to do with mutual fund flows and positioning heading into year end apparently. I believe the fiscal year ends on 10/31 for these funds, so they are active in September and October. Market watchers seem to unanimously know that September and October are seasonally weak periods.

• The Fed follows the 2-year yield.

• Do not try to trade earnings. If I knew the news of tomorrow, I still could not tell you what the price of Pepsi stock will do for example. We never know what the price reaction will immediately be because we do not know if information is priced into a stock. If we do see a big move of a stock based on an event or news, then we can conclude that that was not priced into the stock. I believe we are seeing a little bit of this right now with the price of Bitcoin. The ETF launch was well known, telegraphed, and even leaked on the Federal Reserve’s X account. Perhaps the rise of bitcoin last year was partially in anticipation of this news, and now that we have it, some are “selling the news”.

• Comparing sectors relative to the overall S&P is a valuable way to gauge market sentiment and momentum. Right now consumer staples are noticeably underperforming. These ae typically stable companies with pricing power that do well when there is fear.

• Understand that market mechanics have changed. People no longer have pension plans, but rather 401k is the new retirement plan. This could mean that there is always an implicit bid in the stock market as every two weeks employees passively allocate to their 401k. We also have behemoth companies that can do whatever they want. They are more credit worthy than the government. Commission free trading also open the flood gates for retail to participate:

I heard a great analogy yesterday from one of my favorite market pundits Josh Brown. He was saying in the NBA if you want to bet on how many 3-point shots will be made in the Knicks game tonight, then looking at historical data does you no good. In today’s NBA nobody plays defense and teams score 120 points a night. Half of the shots in each game are 3s. It was never like that in Jordan or Shaq or even Kobe’s era. Those guys were maybe only scoring 100 points per game if that. The game was more physical back then and big men were more important than shooters. If I run a query of all NBA games from 1950-2024, I may find that the average number of 3s made was 15. You open your DraftKings app, and see the line is o/u 25. Obviously, you would take the over as you have identified a dislocation in the market. However, the historical data is misleading you because the NBA is completely different today. I also, believe that this phenomenon is like the stock market today.

In conclusion, I learned more than I could imagine in 2023, and I cannot wait to learn more in 2024. Every day is a new opportunity. I no longer view stocks as pieces of paper that I hope to sell for more than I bought it for. I look at stocks as ownership of the best companies in the world. In the long-run, I get to participate the success of America and the innovations that come. The stock market is incredibly important with regards to capital structure, 401k plans, dividend growth, sentiment, etc. We take for granted how cool it is that we can log in to our phone and invest in the best companies in the world. These are companies that are on the cutting edge of technology, health care innovation, military weapons, cyber security, etc. The stock market can be a casino if you want it to be, but it can also be one of the best wealth creating mechanism known to mankind.

One last thought for the day: One of my favorite market watcher’s Brian Belsky famously says, “stocks lead earnings which lead the economy”. I find this so simple yet so profound. Stocks are a discounting mechanism. My interpretation of my textbook’s explanation of the efficient market hypothesis is that there is no point in trying to beat the S&P because all news/information is already priced in. The S&P is a market cap weighted index that regularly updates its diverse 500 holdings. Market participants use the S&P as “the market” instead of the Dow because the Dow is only a handful of blue-chip companies and is price weighted. Also, they need to be poked with a stick to update the holdings within the index. Unless investors have inside information, then there cannot be an edge. If stocks make a big move/gap down, then there is a reason. They are discounting some potential negative news/event that could bring down earnings