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2023 – Some Perspective on a Magnificent Year!

2023 – Some Perspective on a Magnificent Year!

January 25, 2024

In 2022, the markets got killed.  The S&P 500 lost nearly 20%, the Nasdaq Composite Index crashed over 33%, and the bond market, for the first time in 46 years, suffered a double-digit hit, plummeting nearly 15% on the year.

As the calendar flipped into 2023, bonds, for the first time EVER, reported a negative 5-year annualized return and the traditional “old standby” 60/40 portfolio took a beating - losing around 16.88% for the year.  If you invested $100,000 in that portfolio on January 1st of 2022, by the end of that year, the value of your investment would have been worth approximately $83,122.  Fast forward one more year to the end of 2023, and that same portfolio (if you just held on) would have ended at $96,799, but still down 3.2% since 01/01/2022, tallying an average LOSS over two years of around 1.6% per year (Source: Vanguard). 

But wait!!  Wasn’t 2023 a BANNER year for stocks??  I thought we were hitting all-time highs here – what gives???? 

If you’re confused by this math, don’t be…Just take note and understand that a “year-to-date” investment result, is only reflecting a relatively short timeframe, in this case, 12 months.  It’s “CYCLE-TO-DATE” investment time horizons that truly illustrate how risk-adjusted performance over a lengthier duration of time (meaning years, not months) can either derail long-term investment performance if risk is not mitigated properly or, can preserve long-term performance if risk is managed responsibly.  Perception of time within the “full cycle” is key here.   

The traditional, balanced approach didn’t work in 2022 and, if you’re a regular reader of my posts, you know that, at Capstone, we were taking cover and reducing overall risk in portfolios in late 2021 and into early 2022.  Our risk reduction strategy allowed us to control the “downside capture” within client portfolios from the “cycle peak,” which we believe occurred in late 2021, until today. 

So, why were we reducing risk at that time?  Is it because we can predict the future with our “Old Wall Street” crystal ball?  Okay, NO.  We all know the answer to that question – nobody has a crystal ball, but, at Capstone, what we do have is nearly 60 years of combined experience and the ability to recognize that businesses, the economy, and capital markets all move in cycles – but just not necessarily at the same exact time.  

Understanding “year-to-date” is fairly cut and dry – we simply look at where the averages were in January and crosscheck the figures against where we are today, right?  Yep, simple enough. 

But identifying the full cycle is a much taller task.  Investors must look much further under the surface to assess a full cycle and they must also understand how to manage the risk/reward tradeoffs that exist in portfolios throughout the course of a full cycle – which is much easier said than done

Okay, so if we truly hit a cycle peak at the end of 2021 and the markets turned for the worse in 2022 as a result, then what was it that made the stock market so magnificent in 2023?  Was it a healthy, broad market recovery of reasonable valuations and strong corporate earnings?  Or maybe the “resilient consumer” driving everything higher?  Or was it really that the cycle is not peaking, and the strong economy woke the stock market up to new a bull market cycle upswing?

Let’s try to break that down…

First, the “resilient consumer”: 

According to the St. Louis Fed, even though the government’s measure of inflation has been slowing (this is known as ‘disinflation’), prices are still highly elevated, wages are lagging, and corporate layoffs are mounting.  This is not great for the average consumer, especially those working more than one job to make ends meet. 

Credit Card Debt is at an all-time high – currently sitting at $1.3T and climbing (you can get a good look at this figure by visiting and, according to ABC News, consumers are missing more payments each month as credit card delinquencies are now also on the rise.

Additionally and in what seems to be a rather drastic (and frankly desperate) move, consumers have been raiding their retirement nest eggs to raise cash.  According to, by the end of 2023, 401(k) loans and 401(k) hardship withdrawals were at all-time highs being described as an “indicator of economic stress” on the consumer’s back, according to the media outlet. 

And here’s a really serious head shaker, if you ask me.  Credit card users are taking on even more high interest credit as applications for line increases have been surging mostly by those with a credit score of 680 or lower (Source:  USA Today) and, as a result, consumers’ bank accounts are being devoured by sky-high interest rate costs.  

And now, how about that “healthy” economy?:

GDP (Growth) is slowing, M2 money supply for the first time in 70 years has gone negative (after skyrocketing to unheard-of levels during the pandemic), Net National Savings is negative (which can only make recessionary periods way worse), the Fed is still in a tightening pattern as they maintain a “higher for longer” interest rate stance, and credit is less plentiful for businesses according to the most recent Senior Loan Officer Opinion Survey (Source:  US Federal Reserve).

According to The Conference Board (a non-profit organization and “Think Tank” that delivers economic projections for “What’s Ahead”), the US Leading Economic Indicators index turned deeply negative in 2022 and remains in a contractionary phase through the end of December 2023.

So, perhaps the consumer isn’t looking so hot as it is backed up against a weakening economy and all warning lights are continuing to flash red here?  Looks that way to me… 

Ok well, that’s all fine and dandy but why, then, did the Nasdaq rise over 40% last year?  Are corporate earnings still healthy, at least? 

In 2023, corporate earnings on the whole declined organically.  According to Barron’s, by the end of the year, Apple became the world’s biggest company after seeing its shares soar by nearly 50%, while its sales and earnings declined over all 4 quarters throughout 2023.  According to Barron’s, Apple’s growth was “all but gone” with “no clear plan for getting it restarted.” 

Apple’s YOY revenue growth near the end of 2021 (our perceived “cycle peak”) was 34% and by the end of 2023, it was -2.8% (Source: Barron’s). 

Okay fine!  Then WHY did the markets turn so bullish in 2023?  Answer:  Artificial intelligence, of course!! 

“AI” was all the rage in 2023 and no matter how bad the earnings landscape appeared, CEOs just kept pushing AI earning them a free pass for missing EPS numbers - it was that simple all year long, you missed the estimate?  No problem!  Just mention Artificial Intelligence as many times as possible in the earnings conference call, and investors were lining up to buy your stock with both hands! 

As Artificial Intelligence infiltrated its way into corporate narratives, the trend itself benefited (or manipulated!) just a handful of companies (or “ticker symbols”) all of which were “big tech” stocks. 

So, who are they and what impact did this have on the markets? 

They were nicknamed the “Magnificent Seven” and included semiconductor chipmaker Nvidia, software giant Microsoft, Amazon, electric vehicle king Tesla, Apple, Google, and Meta – formerly known as Facebook. 

The impact that these 7 stocks had on the markets in 2023 was immense.  By November, the Magnificent Seven made up nearly 30% of the S&P 500 and were solely the reason that index was up 8.5% as of 10/31/2023.  That’s right, these 7 stocks, ALONE, were the reason the market went up and without them, the remainder of the “S&P 493” was actually down nearly 5% Y-T-D (Source:  Yahoo Finance).

So does all that narrow leadership make for a healthy stock market?  I think it’s relatively easy to argue that it does not…Why?  Because the momentum can cut volatility in either direction – up OR DOWN.  Last year, these seven stocks singlehandedly moved entire market averages back near all-time highs and investors who were lucky enough to buy the MAG-7 names on the first trading day of 2023 were handsomely rewarded while the remainder of the stock market basically went nowhere.   

What could go wrong? 

Well let’s take the other side for a moment.  Was there a time where the Magnificent Seven weren’t so magnificent??

If, at the end of 2021 (at the “cycle peak”), you invested $100,000 into the Magnificent Seven, 11-months later, your investment was worth $49,880, a loss of more than 50%.  What’s even more surprising though, is that the same portfolio, today, even after ALL of those magnificent moves that these seven stocks made 2023, would be worth around $93,000, a loss of around $7,000 or approximately 3% per year!  Clearly, investors need to observe caution and understand the rules of the road in risk management here!

At Capstone, we use a disciplined process when managing investment risk and recommending portfolio strategies to clients.  That process allows us to responsibly navigate volatility throughout full investment and business cycles without having to chase “acronyms” of “hot stocks” like “FANG” or “MAGMA”, and, for that matter, we don’t have a need to follow any magnificent “magic moves or guiding lights” in capital markets to maintain proper balance in client portfolios while meeting long-term investment objectives.   

As always, for any Capstone clients reading this post, if you have questions regarding your portfolio, please call us.  If you are not yet a client of Capstone’s and are worried about investment risk in your brokerage account, feel free to contact us for a no-cost or obligation second opinion.  The advisors at Capstone can be reached at 888-587-7526 (Toll Free) or at (570) 587-7800 (Office Direct).

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.