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Iron Capital Insights

  • Iron Capital Insights
  • December 29, 2023
  • Chuck Osborne

Out with the Old, In with the New

Goodbye 2023 and hello 2024. To say that 2023 has been challenging would be a gross understatement, so I am not sad to see it go. A new year always brings hope for new beginnings.

We have written all year about the frustration of false narratives and a misleading S&P 500, which has become dominated by just seven stocks. However, we must admit that it has ended on a much brighter note. Patience has paid off, and finally the onslaught of solid economic data paired with the slowing of inflation has made the bears change their tune. Of course, admitting that you are wrong is a very hard thing, so most pundits have moved from “a recession is certain” to, “we are headed for a soft landing.” What does “soft landing” mean? It means one can admit we are not headed into a recession while not admitting that he has been completely wrong for 18 months.

Not only have we rallied, but it has been a broad-based rally to the end, unlike earlier in the year. We have been saying for some time that small company stocks look more attractive than the large technology stocks that have dominated in 2023, yet the market continued to ignore them, until they didn’t. Through December 19, the one-month return for the Small Value index is 12.72 percent, and for the Small Growth index it is 12.46 percent. The Large Growth index, which has dominated, returned 5.63 percent over the same period. Small Value, which we have been very keen on, is now up 14.45 percent YTD. Should it finish there, many will look back at 2023 and say, “Chuck, why the frustration? Yes, that is a lesser return than the S&P 500, but it is still pretty good. Don’t be such a sourpuss.”

True enough, but this is what lay people often miss: the year-to-date return is now 14.45 percent, but 12.72 percent of that happened in just the last four weeks. This is how stocks actually move. They do not go up steadily at a 14.45 percent rate for 12 months; they go nowhere for long periods, and then they jump. This is both why it is impossible to time the market and why it is so tempting to try to time it anyway.

We often say that it is actually fairly easy to know what the market is going to do, it is just impossible to know when it will do it. Small company stocks were too attractively valued to not eventually get some love, but they stayed that way for a frustratingly long time. This is why investing requires patience. It is good to end the year with that patience paying off.

So, is this it? What will 2024 bring us? Many are saying that the market has come too far too fast and is too expensive. They are right if the market is defined as seven large stocks in the S&P 500. Interestingly, the S&P, led by those seven stocks, is slightly above where it was at the beginning of 2022, the year of the bear market. However, a well-diversified global stock portfolio that includes the S&P but also small companies, international companies, and value stocks, is still roughly 8 percent away from getting back.

We are optimistic heading into 2024. We do believe the rotation away from large technology stocks and into everything else will continue. That may dampen the return of the S&P 500, but we don’t have to invest only in the S&P 500. We would not be surprised to see a January correction as investors take profits in what worked in 2023, but those proceeds are likely to go into the other areas of the market. That would be healthy.

In the end, 2024 will be what it will be, and we will have to face the reality of what is even if that isn’t what we think it should be. Prudent investing takes patience. After all, we are in it for the long haul.

Happy New Year!

Warm regards,

Chuck Osborne, CFA
Managing Director