Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. As a firm, we seek to obtain Alpha through strategic rebalancing and tax loss harvesting. It is very difficult to predict the future of the markets, so we make trades based on what we know and what we can control. We knew that at the beginning of 2023, the Federal Reserve was going to continue raising short-term interest rates into the summer, followed by a more stable period to allow the economy to adjust to the higher rates. Our strategy was to wait for an opportunity to rebalance equity exposure toward growth and lock in higher yields when we felt the Fed was nearing the end of its rate hike cycle.
Equity markets bottomed in October 2022, and that momentum continued into January 2023. Those gains were quickly reversed as the market retreated due to the regional banking crisis. After that downturn, we took the opportunity to rebalance portfolios in June. We moved our large cap allocation to a growth overweight, and we implemented the defined maturity ETF strategy in the bond allocations. Hindsight is 20/20, but those trades resulted in meaningful portfolio Alpha.
Key Highlights of 2023:
Slight Tilt: Overweighting large-cap growth over value resulted in a model performance of 30.1%, outperforming the S&P 500 index by 4.88%.
Asset Replacement: We swapped our allocation to energy infrastructure from real estate in October 2022 as the Fed got aggressive in its battle on inflation. Energy infrastructure outperformed real estate by 11.46% in 2023.
Bond Strategy: By adopting a laddering approach to bonds and diversifying bond sectors, our taxable bond portfolio outperformed the index by 1.67%, putting bond yields well over 5%.
Themes for 2024
While the future is always uncertain, we have our eye on the following events for the upcoming year:
1. Interest Rates: The Federal Reserve is at the tail end of its interest rate hikes.
2. Inflation Trends: Inflation is expected to decelerate by mid-year.
3. Wage Growth: Currently at 6% vs. 3.7% inflation, expected to converge.
4. Bond Yield Dynamics: Short-term bond yields have peaked, while long-term yields are declining, reflecting the Fed's recent ambitious statements about lowering rates in 2024.
5. Market Expectations: Capital markets are anticipating a 1.25% rate cut in 2024, which has current implications for market valuations.
6. Election Year Impact: The upcoming election year adds another layer of complexity to market dynamics.
Family Financial’s Focus for 2024:
With the US successfully navigating a 'soft landing' in 2024, our strategy remains data-driven and agile. We're monitoring the real estate market, particularly the impact of variable-rate mortgage resets and the recent trend of decreasing rents.
Our stance for 2024 is to maintain our equity positions while slightly increasing our short-term bond exposure. This balanced approach aims to capitalize on higher yields without significantly impacting returns, providing a buffer against potential volatility.
Annual Review Season:
The coming months mark our annual review season, when we meet with each client to discuss your past investment performance, update your financial plans, and explore potential adjustments for the year ahead. Your financial success is our priority.
