The early start to the retail holiday season has seeped into financial markets.
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As of this writing, stock indexes have completed seven consecutive winning weeks, ushering in the “Santa Claus rally” in late October, rather than in December.
Santa fired up his sled around Halloween and has been sprinkling holiday magic on financial markets, as evidence emerged that inflation is slowing and the Fed is gearing up to start cutting interest rates.
The fourth-quarter advance has been a relief for investors, many of whom are still feeling the sting of 2022, a year when the S&P 500 fell 19.4 percent and the tech-heavy NASDAQ tumbled by 33.1%.
Last year was doubly painful because bonds did not provide ballast against the poor performance of stocks, with the S&P aggregate bond index down 12%.
In a notable comeback, stocks have come charging back: the Dow Jones industrial average closed above 37,000 and reached a new all-time high; the S&P 500 is now within 1.6% of its all-time high, reached on January 3, 2022, and is up more than 22% on the year; and the Nasdaq Composite, the biggest loser of 2022, has put up a new all-time high, ahead by more than 40% on the year.
Bond investors have endured a wild ride in 2023, as the yield on the 10-year Treasury bond rose above the 5% level for the first time in 16 years, pushing prices down.
But since late October, yields have come down and prices are higher, putting investors on track for a positive return of more than 4.5% on the year, as measured by the S&P U.S. Aggregate Bond Index.
In thinking about the last two years, there are three specific lessons that are helpful in contemplating your next action:
1. You STILL can’t time the market…REALLY!
After the 2022 wash-out, there were many investors who bailed out of their long-term strategies and sought the protection of safe assets, like high yielding savings and money market accounts, CDs, and Treasury bills, all of which were finally paying a decent amount of interest.
I heard from a lot of those folks, who would regale me with their game plans that went something like, “I got out of stocks and bonds and went to cash (I’m getting 5%!!!), but I plan to get back in when things get better.”
Of course, this is the fallacy of attempting to time the market: Those people probably felt great, until recently. Now as we approach the end of the year and stock and bond markets have regained their footing, many will be forced to buy back into their positions, but at much higher levels, or stay in cash, as rates dwindle in the future.
2. Picking individual stocks is hard
A year ago, the technology sector was on its heels. Profits were down, layoffs were up, and investors were trying to figure out the next great sector. And yet, last year’s losers have become this year’s BIG winners.
They have been dubbed “The Magnificent Seven” (Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft, and Tesla) and together, they are up around 70% year to date.
Of course, if you own the S&P 500 index, you have a piece of the action, but if your expensive fund manager was not a believer in tech’s resurgence, you missed out. Another reason to own low fee and tax efficient index mutual and exchange-traded funds.
3. Boring is good…and works
The big investor takeaway from the last two years is to stick to your diversified portfolio of cheap funds over the long term and you will stay out of trouble.
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Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.
