Fourth Quarter Newsletter

Responsible Guidance:  Fourth Quarter 2023 Newsletter, January 2024

Availability Bias

Availability bias suggests that planning for the future can be impacted by information or recent experiences that are more easily recalled. A quick internet search for investment themes of 2023 produced “falling inflation”, “peaking interest rates”, “recession”, “migration trends”, and “climate economics”. Just using these topics alone, what would you expect performance was in 2023 for the indexes we cover? Would you be able to tell how many indexes produced positive returns in 2023?  Do you think you would know what the best performing index was for the fourth quarter, the best for the year? With the limited information provided, we think it would be difficult to get those answers correct.

Searching for 2024 investment themes produces “cautious optimism for both stocks and bonds”, “inflation edges lower”, and “peaking interest rates”. Do these themes influence our outlook and planning for the coming year? The reality is that we have no idea if these themes will have any meaningful representation in 2024. We have said it before and will say it again - predicting is extremely difficult

So, if the availability of 2023’s performances and 2024’s themes do not impact financial planning, what does? As always, it depends on you and Your Personal Economy^SM. The process of developing a financial plan does involve having defined plans for things mostly in your control, like income and spending, while planning for a range of outcomes for things outside of your and our control, like economic and market performances and, quite frankly, election results. Planning for a range of outcomes provides guidance for different environments, not just the one you might think is most likely because of some recent information that came to you. If you would like to learn more about how to help keep behavioral biases, like availability bias, outside of your financial planning process, please reach out to us.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents equity investments across 23 developed and 24 emerging markets. The index was up 11.13% in the fourth quarter, driving year-to-date (YTD) performance to 21.46%. Global equity performance rebounded, finishing the year strong. Concerns about inflation, interest rates, and geopolitical risks created some bumps in market performance throughout the year. But specific concerns about inflation and interest rates appear to have cooled down for now.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. It was up 8.08% in the fourth quarter, helping YTD performance to finish positive, up 5.19%. The decreasing headwinds from inflation and rising interest rates allowed global bonds to finish in positive territory.

U.S. Economy

Inflation data and job data were favorable in the fourth quarter and stock and bond markets responded accordingly. The Fed did signal possible rate cuts for 2024, which presented concerns about future growth. For now, economic growth and job growth both continue, keeping immediate recession fears at bay.   

The Bureau of Economic Analysis (BEA) announced in its third estimate for the third quarter of 2023 that real Gross Domestic Product (GDP) increased at an annual rate of 4.9% (the full press release can be found at https://www.bea.gov).  This was the fifth quarter in a row of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the fourth quarter of 2023) using an approach like the BEA. On January 10, 2024, the estimate for fourth quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.2%. Note that this estimate is updated regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow

Job growth remains strong. According to the Bureau of Labor Statistics (BLS), the U.S. gained 216,000 jobs for the month of December, and the unemployment rate remained below 4%, at 3.7%. BLS indicated job growth was notable in government, health care, social assistance, and construction. There were job losses reported in transportation and warehousing (full press release can be found at:  https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, had a strong fourth quarter, up 11.69%. The popular stock index finished the year up 26.29%. It was the best performing index for the year of those we cover in this newsletter. Sectors adding to the positive performance included technology, communication services, and consumer discretionary. Though the quarter was strong, the energy sector did experience challenges.

For technical analysts and trend followers, the index spent a few days below the 200-day moving average in late October/ early November but rallied quickly back above and finished the year above both the 50-day and 200-day averages.

Dividing index components into growth and value, growth-focused stocks outperformed in 2023, after trailing value in 2022.

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 10.42% in the fourth quarter, finishing the year up 18.24%. Non-developed, or emerging countries, measured by the MSCI EM index, was up 7.86% for the quarter, and was up 9.83% for the year. Easing inflation concerns helped bolster performance even though we saw geopolitical tensions increase. 

Stocks in developed countries outside of the U.S. underperformed the S&P 500 in the current quarter, as well as YTD. Prior to performance in 2022, the last time international stocks finished ahead of U.S. stocks was in 2017.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, rallied 6.82% in the fourth quarter, helping performance for the year finish in positive territory, up 5.53%. The index gauges the performance of investment-grade intermediate bonds. With inflation reducing and the Fed introducing the possibility of rate cuts in 2024, intermediate and longer-term rates moved lower causing bonds to increase in value.

The 10-year U.S. Treasury bond yield was at 3.88% at the end of the fourth quarter, which is basically the same rate for a 10-year at the beginning of the year. Though the 10-year started and ended in similar places, there was rate volatility throughout the year. It experienced some of its highest rates in October, hovering around 5.00% at times.

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion and fixed-income investors are compensated for taking longer-term risk. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of 2023, the 2-year was 4.23% (and 10-year 3.88% per above) keeping the yield curve inverted by 35 basis points (a basis point represents 1/100 of 1%). As a point of reference, the yield curve has basically been inverted since the third quarter of 2022, just after the Fed started raising rates in March of 2022 to fight inflation. 

The yield curve has flattened during the last two quarters. Flattening may suggest that bond investors remain uncertain about future economic growth but may be less concerned about higher interest rates having an immediate negative impact on growth.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, rebounded strongly in the fourth quarter, up 17.98%. The strongest performing index on our list for the fourth quarter. The index finished the year up 11.36%. This is an example of the difficulty in trying to make predictions. You may remember a lot of negative news about commercial real estate due to rising rates, banking issues, and reduced vacancies as work-from-home policies continue. Commercial real estate is heavily reliant on debt as a business. Any stresses in the financial industry can impact the important funding that the industry relies on. The good news is that the concerns are not much of a secret and the index was able to generate double digit returns on the year.

According to Freddie Mac (FM), the average 30-year residential home mortgage rate dropped with the move down in interest rates. The current U.S. average weekly rate (as of 1/11/2024) was roughly 6.7%. During the past 52 weeks, the rate has been between 6.1% and 7.8%.. 

Natural Resources

The Bloomberg Commodity Index (BCOM) was the only negative performing index for the fourth quarter of those in our newsletter. You may remember that it was the only positive performer in the third quarter. The index was down 4.63% for the quarter and finished the year down 7.91%. Energy-related investments were some of the biggest distractors in performance, as positive performances from metals and agricultural-related items were not enough to generate positive returns overall for the index.  

After being the only positive performing index in our newsletter in 2022, it was the only negative in 2023.

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are Registered Investment Advisors (Fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money. 

During the fourth quarter, you may have noticed trading activity pick up. As discussed, tax-loss harvesting, or tax-trading, intensifies during the fourth quarter, as time to take advantage of opportunities shrinks. Also, our investment committee has approved changes to investment choices in our alternative asset selections.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^sm

Concluding Comments  

All the indexes, except natural resources, were positive in 2023. The Real Estate index we cover was the best performing of those we cover, for the fourth quarter, up 17.98%. The index for U.S. stocks had the best results for the year, up 26.29%. Were you able to guess these correctly from the original information?

Avoiding negative impacts from biases, like availability bias, can help improve chances for financial success for you and Your Personal Economy^SM.

Baron Updates

We hope everyone had a great holiday season and a start to the new year!  As we begin 2024, we suggest taking a fresh look at your financials using our 2024 checklist. As always, we are available for a call or meeting, or as mentioned above, to put you in contact with outside professionals who can help you outside of investing.

For more educational content, please  visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others. Please contact us if you have any questions.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

A protective measure we use for our Baron clients, particularly important as they get older, is the Trusted Contact form that is kept on file at Schwab and at Baron. If you have not already completed this form by assigning a trusted contact, let us know. The more recent Schwab account applications include this form.

In addition to helping clients with their financial lives, we are always happy to help in other ways, as well.  Keep in mind that you can always come to our Fair Lawn office to use our copying, shredding, and notary services.  Just reach out to us if you wish to come in and take advantage of those services.

For our clients and friends in Sarasota, we hope to see you at our Spring Training Baseball Game Event on March 2nd!

In closing, Baron Financial Group is humbled to announce that Advisors Anthony Benante (in Sarasota) and Victor Cannillo and Nicholas Scheibner (in New Jersey) are once again recognized as Five Star Wealth Managers. You can read more about this award and its criteria on our website.

We wish you all a happy, healthy, and prosperous New Year!

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 17, 2024 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.