2023 Q4 Market and Economic Update

In the long-term, what you earn is determined by what you pay for what you get. I like to monitor how expensive stocks are from various perspectives. One of my favorite valuation ratios, the Shiller PE, or CAPE, jumped from 29x to 32x over the last quarter. Putting that into perspective, as we turned the calendar to 2024, it was 48% above its 50-year average and 21% above is average over the last 20 years, up from 35% and 11%, respectively a year ago. This trails only 1929, 1999-2000 and 2021 for the highest valuation in history. The price of the S&P 500 divided by total sales is 67% above its average since 2000, and has only been higher in 2021 and early 2022. If we use the slightly more volatile price to trailing earnings ratio, the S&P 500 opened 2024 at 25.55x, a 27% premium to its 50-year average, and a 29% increase from 1/1/2023. After trending toward historical valuations for most of 2022, stocks have rebounded, and made an impressive rally. The S&P 500 returned a blistering 12% in the fourth quarter to cap a 26.2% return for the year, building on a 7% return in the fourth quarter of 2022. Investors who piled in at the end of summer of ’22 would have enjoyed an increase in their investment of about 1/3 in just fifteen months. The NASDAQ did even better, with a 55% return in 2023. The Russell 2000 small cap index didn’t keep up with its larger brethren, but still returned an impressive 16.8% for the calendar year, despite being negative through the first three quarters. International stocks continued to trail the US, but still posted an impressive 15.6% total return. The broad US bond market bounced off a multi-year low for a 5.6% return for the year. In 2022, it was hard to make money in anything, and in 2023, it was hard not to make money, as everything was up. Not everything was up uniformly, however. The Invesco S&P 500 Equal Weight ETF lagged the S&P 500 (market value weighted) by 12.5 percentage points, getting beat by 96% of US large cap blend funds, per Morningstar. It was the biggest stocks that drove the performance of the market. Herein lies one of the risks to this market – extreme concentration in a small number of very expensive stocks.

Continue reading here: 23 Q4 Econ Update.pdf