What 2023 Taught Us About Investment Strategies, and What to Expect in 2024

2023 is officially behind us, and it is always helpful to look back at what worked throughout the year in order to position your portfolios for another successful trip around the sun. You’ll want to do this for taxes but also for income and investment performance as well.

READ: How to Invest in 2024 — Insights from Wealth Managers and Stock Market Experts

2023

To beat the S&P 500 Index in 2023 you had to own either all the Magnificent 7 technology/AI companies (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia, and Telsa) or significantly overweight 3-4 of them. On the bond side of the ledger, you wanted to keep your duration or interest rate risk very short. The best option this year in the bond market was owning treasury bills. With bills you received higher rates of interest, got your money back quickly, and didn’t take on any credit risk. Two simple investment strategies.

However, after the massive sell-off in the NASDAQ and tech stocks in 2022, you might have been gun shy to just own the Magnificent 7. Since the Total Bond Market Index lost 13.1% last year, you might have been tempted to extend the duration on your bond portfolio to pick up more yield. The problem with that strategy was the Federal Reserve hadn’t finished raising interest rates and because of that, longer-term bonds lost money for a third year in a row. The good news, 2024 could be the year to be more diversified and extend the duration on your bond portfolios.

READ: Diversify Your Portfolio — Beyond AI Stocks

2024

Stocks

Since only owning 7 tech/AI stocks in a portfolio isn’t prudent from a diversification perspective, 2024 could be the year to spread out your bets in other sectors of the market that are cheaper relative to the Magnificent 7. One strategy could be to buy dividend-paying stocks. This group of companies could start to benefit from the Federal Reserve being on hold and really pay off if interest rates get cut next year.

Higher interest rates on CDs, money market funds and treasury bills were stiff competition for dividend-paying stocks this year. Aside from the technology and communication sectors, most S&P 500 stocks significantly underperformed. Consumer staples, financials, energy, utility and industrial stocks pay generous dividends and trade at much more reasonable price-earnings ratios.

Bonds

The total bond market index has now produced negative returns for 3 years in a row, which has never happened before. This has been particularly painful if investors owned bond funds because they didn’t get their money back like owners of individual bonds when their bonds matured. They also paid higher fees.

Investors have several ways to play the bond market in 2024. They can stay short by just buying treasury bills which mature in less than a year. You buy these bills at a slight discount to par and when they mature you get the face amount. For example, you pay $98 but get $100 when the bills mature. The other great thing about bills is they pay a 1% higher interest than a 10-year treasury bond today.

The investment risk is if the Federal Reserve aggressively cuts short-term rates next year because inflation hits their 2% target, or we have a recession. In either of these scenarios, when your bills mature you would most likely be reinvesting at a lower interest rate. If you buy bonds that mature past a year your bonds will appreciate if rates fall next year. Intermediate Corporate bonds pay much higher rates of interest than treasury bonds, so they might be a good option, too. Recently, for my clients, I have doubled their duration or interest rate risk by buying the 2-year treasury bond yielding 5%.

The bottom line

Making money in either the stock or the bond markets in 2023 wasn’t easy. You had to own just the right 7 stocks and keep the duration on your bond portfolio very short. Not many investors did, either. The good news, what worked well this year is no guarantee it will work as well in 2024.

In fact, odds favor doing something a tad different, particularly with the Federal Reserve seemingly on hold, inflation coming down, and bond yields at all-time highs. Ask your advisor about investing in dividend paying stocks and treasury or corporate bonds that mature in 5-7 years. You might be pleasantly surprised at this time next year.

 

Fred Taylor UPDATED

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information.

Navigating the Economic Crossroads: Fed’s 11th Rate Hike and Its Impact on Investments in 2023

To no one’s surprise, the Federal Reserve raised short-term interest rates again during their July meeting. This was their 11th increase since the spring of 2022. As expected, the Fed Funds rate went up 25 basis points, or a quarter of 1 percent. The new rate is 5.25%-5.50%.

What remains unclear is whether this is the last interest rate increase for the current tightening cycle. If inflation continues to come down to the Fed’s 2% target, then it probably is. However, we won’t know until the end of the year because Federal Reserve Chair Jerome Powell will most likely keep his options open and the markets guessing. Rate decisions will be data-dependent, primarily on the monthly unemployment, PCE and CPI numbers. The great news is that inflation has improved from over 9% annually in the spring of 2022 to 3% today, so interest rate increases have worked to bring down inflation. 

As a result of this improvement in inflation, there is now a lot of discussion that we won’t have a recession in 2023 and Powell will have accomplished a “soft landing” that no one expected as recently as a few months ago.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

So, what does this mean for investors investing in the stock and bond markets?

Stock Markets

The rally in the stock market in 2023 is reflecting a Goldilocks economy: not too hot, and not too cold. This rally began in earnest right after chip maker Nvidia released their blockbuster earnings report in May. This ignited a massive rally in AI and technology stocks. However, over the last month, this rally has broadened out to other sectors of the market, which is what is needed to keep the new bull market alive. Whether this can continue will depend on corporate earnings, inflation, and interest rates. So far, so good.

As I mentioned in my June article, there are other sectors of the stock market that are attractive. Dividend-paying stocks in the healthcare, financial, energy and industrial sectors look inexpensive compared to AI and technology stocks. Even international stocks are attractive and are trading at an average price-earnings ratio of 13 versus the S&P 500 Index Fund with an average PE ratio of 23.

Bonds & Money Market Funds

For investors who don’t want to buy stocks, bonds are a good alternative once again. Riskless short-term treasury bills yield 5.5%; money market funds and investment-grade corporate bonds pay 5%. If investors want to take more fixed-income risk, they can buy high-yield bonds that pay over 8%. Bond yields haven’t been this favorable since 2008 and the financial crisis.

The Fed will meet again September 19-20. Today the stock market is telling us there will be a soft landing in lieu of a recession, and no more interest rate increases for the rest of the year. It is difficult for investors to trust these rosy scenarios, jump on the bandwagon and chase this rally, particularly if they have been sitting on the sidelines. We could see a serious case of FOMO (“fear of missing out”) by the end of the year, and this is like adding gasoline to a fire.

Investors tend to hate watching the markets go up without them. This is why market timing is impossible. As our Beacon Pointe Chief Investment Officer likes to say, volatility is the price we pay to make money in the markets. However, if these three assumptions are wrong, whatever positive gains we have seen so far this year could evaporate. Being an investor is not easy.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. 

Exploring Opportunities in the Global Stock Market: Unlocking Profit Potential in 2023

There is an old adage on Wall Street: “Sell in May and go away.” In theory, on a calendar basis, the worst months to be invested in the stock market are from May to November.

Whether this is true or not is anybody’s guess, but last year it certainly was. Today, investors must decide how best to position their portfolios for the rest of 2023. Should you buy dividend-paying stocks, longer-duration bonds to lock in yields, or invest money overseas? Before you can answer any of these important questions, consider what the Federal Reserve might do with short-term interest rates for the rest of the year to combat inflation, and how the debt ceiling gets resolved. Both issues will impact the direction of the markets and, quite possibly, your investments.

READ: 4 Key Asset Allocation Strategies for 2023

Interest rates & inflation

Since the fall of 2021, the Federal Reserve has struggled with the issue of inflation. At first, they considered it transitory, but last spring inflation became the real deal. Consequently, the Fed had to aggressively raise interest rates nine times. Fortunately, inflation has begun to come down, from over 9% to 5%, but the Fed’s inflation target is 2%. This means the Fed still has some more work to do. There is a chance with the latest regional banking crisis in March, small businesses and individuals will find it harder to get loans from their local banks, which, in turn, could slow down the economy. However, the Fed is poised to raise interest rates at least one more time on May 3. After that, it will be data-dependent, with the unemployment and consumer price index numbers being scrutinized carefully to get a read on inflation.

Debt ceiling

Looming in the not-too-distant future, the debt ceiling issue could turn into a full-blown crisis if the Republicans in the House of Representatives and President Biden do not raise the debt ceiling before the government is no longer able to pay its bills.

Treasury Secretary Janet Yellen has warned Congress that time is running out — if the April tax receipts are not high enough, the due date could be as soon as early June instead of August. Republicans would like to extract spending cuts from the Democrats/President Biden in exchange for passing a debt ceiling resolution. At this point in time, neither side wants to compromise. If they do not find common ground, the country could face financial Armageddon by defaulting on its debt. The consequences would be catastrophic. We came close to a debt default in 2011. Because of that threat, America’s debt rating was downgraded by Standard & Poor’s from AAA to AA+ for the first time. A default could make borrowing costs increase, cause a massive sell-off in the stock market, or bring on a recession.

READ: What Does a Recession Mean for Your Finances?

Investment ideas

Despite higher interest rates, inflation, and the debt ceiling issue, the stock market is the greatest discounting mechanism ever created. By the time all the bad news comes to fruition, investors are already looking ahead and markets tend to climb a proverbial wall of worry and go higher. Knowing this, where are logical places to invest money for the rest of 2023?

Dividend-paying stocks

When markets are volatile and the headlines are scary, a great place to ride out the storm is with a diversified mix of blue-chip dividend-paying stocks. Invest in companies that can increase their dividends regardless of what economic cycle we are in. Today, stocks that provide meaningful and growing dividends are in the consumer non-durable, industrial, energy, and utility sectors. Another positive is that these stocks have been underperforming year-to-date versus the largest technology stocks and should be able to weather a recession because their products tend to be essential.

Bonds and money market funds

After the worst bond market in decades and much higher interest rates, now is a decent time to buy bonds or money market funds. In the bond market, you may want to consider a barbell approach. You do this with bond ladders, where you buy both short-term bonds and long-term bonds. If you do this, you could benefit if interest rates rise because you will have new money from your shorter-term maturities to reinvest annually. If interest rates drop, you will get appreciation on your longer-term bonds. If you want to have more liquidity and less interest rate risk, you can keep your money in a brokerage money market fund yielding almost 5%. 

International stock market

For the first time in a decade, the international stock market is outperforming U.S. stocks. This makes sense for a myriad of reasons.

First, the dollar has quite possibly peaked; when this happens, international companies make more money by selling their products to consumers in the United States. Second, China has recently reopened for business after three years of tight COVID-19 restrictions. Third, international stocks are inherently cheaper. Today they trade at significantly lower price earnings multiples. And finally, Americans typically have a home investment bias and may be under-allocated overseas. If international stocks continue to outperform, money could move out of the U.S. to international markets to find higher returns.

The bottom line

It has not been easy being an investor since the spring of 2020 and the pandemic, but despite all the volatility and negative headlines, we believe you have been better off staying invested through all the ups and downs. Moreover, for the first time since 2008, if you want to play it safe, you can own short-term bonds and brokerage money market funds. They all yield close to 5%. For longer-term investors, collecting dividends from great companies here and abroad is not a bad way to go either. 

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

Bear Market Rally or New Bull Market? 

Investment returns, as of June 30th, 2022, marked the worst start for both the stock and bond markets in 50 years. Inflation, rising interest rates, negative GDP growth, de-globalization, political unrest, and the war in Ukraine hit investors simultaneously. There was nowhere to hide. Even defensive sectors like gold, TIPs, and REITs were negative in the first half of the year. Cash was the only asset class to remain steady. However, sitting in cash for the long term means you are losing money due to inflation. 

Since July 1, the markets have rebounded and cut the June 30 losses in half. Instead of being down 20% on the S&P 500, investors are only down 10% year-to-date. The NASDAQ index is up 20% from the low in June. This turnaround has been caused by lower gas prices at the pump, July’s higher employment number, and an improvement on the inflation front. The Consumer Price Index dropped from 9.1% to 8.5% this month. Producer prices showed some improvement, too. Maybe inflation has peaked? If it has, the Federal Reserve can stop being so aggressive about raising short-term interest rates after their September meeting. As of today, it is a coin toss whether they raise interest rates 50 or 75 basis points on September 21st. 

READ — Playing Defense During Bear Markets

So, what do you do as an investor? Change your asset allocation? Invest more cash? Do nothing? All this volatility is what makes it so challenging to be an investor. Every day we are bombarded with headlines that are usually quite negative and scary. It can be hard to feel comfortable about current market conditions, but at least the market seems to be signaling that things aren’t getting any worse. Now is a good time to plan for the remaining four months of the year. 

Asset Allocation 

In retirement accounts, if you have a long-term time horizon, this is an excellent opportunity to increase your equity exposure. Look at your 401k options and make sure you have enough invested in stocks to meet your retirement objectives. Over time, stocks have historically outperformed bonds. However, make sure you are set up for dividend reinvestment. Bear markets are wonderful opportunities to dollar cost average and hopefully buy more shares at lower prices. The same can be said for your ROTH IRAs or regular IRAs. With the markets down in 2022, you are buying stocks at a significant discount from the highs reached in January. 

Cash 

Cash feels good in the short run because you aren’t showing any losses. However, over a longer period, you are losing money on your cash due to inflation. For example, if inflation is 8.5% and cash earns zero, you lose 8.5%. A better way to go would be to buy the one-year treasury bill, which yields over 3%. You can sell the treasury if you need the cash in less than a year (with likely no principal risk) or let the bill mature in a year, and you get your money back. If interest rates are higher, you can reinvest at a higher rate or take this cash and buy more stocks. 

Tax Losses 

If you are like Warren Buffet, you sit tight and don’t worry about the day-to-day volatility of the markets. This is easier said than done. However, you can make lemonade out of a few lemons in your taxable accounts. For example, if you bought a stock in early January this year, you most likely have a loss. Today, you could sell that lemon for a loss and either buy back this stock in 31 days or reinvest the cash into another stock that has better prospects going forward. Tax losses can be used in perpetuity, so if you took some gains earlier in the year, you could use losses to offset the gains or carry the loss forward into the future. 

Nobody can successfully predict whether this rally is transitory or a new bull market; consequently, market timing is a fool’s errand. The stock market has, over a long period of time, usually returned 10% a year and typically goes up 70% of the time, but that doesn’t mean it will continue to do so. Volatility is the price we pay for generational wealth. There is no free lunch. Before the end of the year, look at the asset allocation in your retirement accounts, invest cash into short-term treasuries, and take tax losses in taxable accounts. These are things you can do now while we are still in a bear market or at the start of a new bull market. At the end of the day, at least you are doing something. 

 

Important Disclosure:  

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.  

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

4 Rules for Short Selling

WHAT IS SHORT SELLING?

Short selling generally entails betting against a stock’s decline. It can yield big rewards, but it’s a complicated and risky venture.

Essentially, you sell a high-priced stock that you’ve borrowed from another investor and wait for the price to decline. Then, you buy more shares at a lower rate and return them to the lender, pocketing the difference in price.

Talk to a financial expert about the best ways to invest your money and if short selling is a good bet for you.

For example:

Stock in a bagged salad company is flying high. As a smart investor, you’ve borrowed 100 shares worth $40 each from another investor and sold them for a total of $4,000 before what looks to be a severe winter, when salad sales typically decline. When a listeria outbreak strikes, salad stock plummets to $25, and you buy 100 shares for $2,500. You then return them to the lender and realize a $1,500 profit.

Investors turn to short selling when it appears they’ve missed an initial opportunity to capitalize on a stock’s success. By speculating on its eventual decline, it’s possible for investors to still make a substantial profit.

POTENTIAL PITFALLS

The biggest risk of short selling is that the stock you’ve borrowed remains high and you aren’t able to buy at a lower price. Some investors look for potential short sales among high-dividend stocks, only to owe thousands of dollars when they continue to perform well.

Consider also:

  • You may have to pay brokerage fees
  • You may need to pay dividends on the borrowed stock

Short selling is not a good choice for people who are just learning to invest or need more security for their money. The risks are high, and it requires near-perfect timing and discipline to get it right.

RULES FOR SHORT SELLING

Professional and amateur investors must follow these four short-sale rules.

1. You Need Permission

Before short selling, you’ll need to access margin trading, which requires permission. A brokerage can help you set up a margin account.

2. Fund Your Margin Account

Margin accounts need to be funded at 150 percent, which means you’ll need to add 50 percent of your potential stock proceeds. If you have 100 shares selling at $10 per share, you’ll need to add $500 to your account.

3. Pay Interest

There are fees associated with borrowing stocks, and you’ll need to pay interest to the broker or brokerage from which stocks are acquired.

4. You Can’t Buy When Stock Trends Down

The only time you can place a short sale order is when stock is stable or rising. When a stock price drops, short sales are not allowed.

SHORT-SALE RESTRICTIONS

No Naked Short Sales

Naked short selling involves selling shares that have not been borrowed or that may not exist. This rule arose during the 2008 financial crisis when panicked bankers and investors attempted to mitigate their losses.

Follow the Uptick Rule

Also referred to as a short-sale restriction, or SSR, the Securities and Exchange Commission restricts the short sale of stocks that have declined 10 percent or more in one day. Once the rule is triggered, it remains in place until the following day.

Holding Stocks in Two Positions isn’t Allowed

Investors can’t hold the stocks of a company in a short (borrowed) and long (owned) position at the same time. Doing so means they’re betting that the stock will crash (short) and soar (long) simultaneously.

Short Sales Must Be Reported

The Short Sale Transparency and Market Fairness Act was introduced in 2021 as an amendment to the Securities Exchange Act of 1934. The bill requires large companies to report short sales within 10 days of the month’s end. Individual investors who place short sales through brokerage accounts must also report their sales.

Short Selling Real Estate

Short selling real estate follows many of the same rules as short selling stocks. Discount real estate brokers can perform a comparative market analysis to help investors find distressed properties that are listed for sale below market value, potentially because of a homeowner’s inability to pay and desire to avoid foreclosure. Investors buy the properties, make necessary repairs, and then sell at market price.

If a homeowner can prove hardship, and an appraisal shows a home is worth less than the mortgage balance, a lender may approve the short sale. A short sale is designed to quickly liquidate the bank’s holding and prevent further loss.

Buying and selling investment properties can result in a large profit, but also a large tax bill. You can save money using a 1031 exchange that allows you to defer your capital gains tax.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.