Resilience: 4th Quarter 2023 Commentary

Resilience

Witnessing how wrong the forecasters got it this time is a good reminder of the importance of staying the course.

Claude Bragg, my nephew and the son of my brother Phillips, is a philosophy major at Wake Forest University—Go Deacs! Claude, a senior, loves to talk philosophy, especially that of the ancient Greeks and Romans. Get him started on the philosophers of the Stoic tradition, including Zeno of Citium, Seneca and Epictetus, and he is hard to stop.

Claude also plays football. He walked on at Wake Forest, made the team and played all four years. Claude was the only philosophy major on the football team. I’ll return to his love of philosophy later in this letter. As for football, Claude will be the first to tell you that he didn’t see much playing time. He played defensive end behind two or three other guys including Boogie Basham, who was drafted into the NFL in the second round in 2021 and currently plays linebacker for the NY Giants. At 6’4” and 245 lbs., Claude is no slouch but he would tell me, “Uncle Ben, those guys are next-level athletes—big, strong and fast!”

It was a punishing four years—playing football for a Division One program is a full-time job any way you cut it. The guys on second and third string go just as hard or harder than the starters. The Daily Grind: 6 AM breakfast (first “feeding”) followed by defensive team meeting, walk-through of plays, team practice, lunch (second feeding), classes, afternoon weight training, more classes, evening meal (third feeding), team meeting or game film watching, dessert (final feeding), study for exams and write papers, then bed.

Claude Bragg, with father Phillips and grandmother Kathy Bragg

Claude blew out his knee in the spring of his freshman year and insisted on rehab and a return to the team. He was healthy in time for spring training, “The Awakening,” as the Deacs call it. I asked him if The Awakening was hard. “It hurts a lot, Uncle Ben.” In the spring of his junior year, Claude tore his shoulder and bicep and required more surgery. His parents thought this might be a great opportunity to hang up the cleats and focus on his studies and a typical college experience. Not Claude. Again, he chose rehab and a return to the team. He worked hard in rehab, made it back and finished out his senior season in gold and black. The young man is tough. He is resilient. He spent four exhausting years in physical pain while juggling his philosophy books. He loved every minute of it.

Speaking of resilience, as we start a new year, perhaps it’s worthwhile to look back a bit. The challenges of the last four years certainly required our resilience.

Despite the obstacles of the last four years, the stock market delivered solid returns. From the end of 2019 through the end of 2023, the S&P 500 returned 57.6% cumulatively (12% annualized). I had to double-check my math after typing that. I find it shocking that the market had an above-average annualized return for the four-year period we’ve just endured! Also shocking to me is the fact that almost all of my worries of the last four years fit so neatly and compactly into that little table above. How can all that big awful stuff fit in that little box? As I think back to the dark days of the virus in 2020, or when I’m reminded of those tortuous days of 2022 when the Fed kept raising rates and bond values kept plummeting, I find myself thinking those events deserve more than a 6-inch by 8-inch table. Those events turned my hair gray and caused some of it to fall out! We need a billboard with huge lettering—“Four tumultuous years!!!” And yet, the stock market performed well over the full period, and yes, all of that history is now just a small blip on the page.

Back to resilience. It is our resilient economy that drives corporate earnings, which ultimately drive the stock market. Even in the face of higher interest rates and punishing inflation, the economy has fared remarkably well, proving wrong the overwhelming consensus view that we would endure a recession in late 2022, or maybe early 2023, or surely by late 2023. As Matt DeVries points out in his article about the market and economy, the recession has proven elusive as jobs remain plentiful and unemployment remains low. I’m not saying we’ll never have a recession; we certainly will, but witnessing how wrong the forecasters got it this time is a good reminder of the importance of staying the course.

Our economy is resilient for several reasons. First, it is big—GDP at the end of 2022 was north of $25 trillion for the year. Millions of people get up and go to work every day. Much of the economy is contractual or non-discretionary—companies, consumers, governments and non-profits enter into long-term agreements to buy/sell/pay—resulting in a significant level of economic activity that is pre-determined. Second, the economy is diversified. The largest sectors (technology, finance, industrial, healthcare, consumer discretionary) are not perfectly correlated and will not be impacted identically by economic shocks like higher interest rates, energy price spikes, changing technology or new government regulations. This serves as a shock absorber; some sectors may be in serious crisis, like the office real-estate sector today, while others, like the technology sector, are thriving. You might hear the term “rolling recession” to describe an economy that overall is growing even as certain sectors are shrinking.

Third, we have a highly flexible labor force. This became more apparent than ever during the pandemic as millions of workers completely changed their employment arrangements. Technology has amplified this phenomenon, permitting remote work, gig work, internet commerce and more flexible schedules. Fourth, according to the US Bureau of Labor Statistics, in 2023, more than 40% of American private sector workers were employed by large corporations (those with more than 1,000 employees), many of which are multinational corporations. These large firms enjoy diversified revenue streams, reducing their dependence on the US and diminishing their need to lay off employees when the US economy isn’t faring well. And finally, America enjoys a high degree of economic freedom including reasonable levels of government regulations and strong property rights. This sturdy platform combined with the incentives of the free market has created a less cyclical economy that is dynamic, efficient and responsive.

And so we move forward. Will the next four years be easier than the last four years? With Fed tightening purportedly behind us and with interest rates closer to long-term averages, some market forecasters have tossed around the word “normal,” as in the markets have “returned to a period of normalcy.” We wish it were so. History makes it clear that there is no such thing. Pick any four-year period in the last 50, 100 or 200 years and you’ll find little snippets of our long history that will fit neatly in a table like that above but which likewise were tumultuous, hair-graying and challenging. Some periods were better than the last four years for sure and some were far worse, but all had their share of challenges. The chart below includes intra-year declines for the S&P 500 for the last 44 years. Despite average intra-year declines of 14.2%, returns were positive for 33 of the 44 years. You can imagine that during each of those intra-year declines, the headlines were scary and the future looked bleak.

Thus far, I’ve written about the performance of the stock market over the last four years. The bond market did not fare as well, chalking up a cumulative total return (loss) over this period of -2.8% (-0.7% annualized). The chart below tells the story all too well. The last four years were truly an historically bad period for bonds.

The carnage of 2022 notwithstanding, this chart also makes clear why bonds are normally considered the “safe” portion of a diversified portfolio. Bonds decline in value from time to time but the average intra-year decline of bonds is far less than that of stocks.

As we go into 2024, be prepared for the tumult of the last four years to continue. There are plenty of things brewing in the world that will keep the media headlines coming fast and furiously. There are those we know about, including the Fed potentially not easing when—or as much as—the market expects, a widening of the war in the Middle East, increasing tensions with China over Taiwan, a deteriorating credit situation with banks and borrowers, a divided Congress unable to function, and of course, the elephant: the discord that will surround the 2024 election. All of these risks are on the minds of investors and reflected in the prices of stocks as they are bought and sold each day. As the future unfolds, prices will adjust; we’ll certainly continue to see volatility. Meanwhile, we’ll count on our resilient economy to push us through the tough times.

I mentioned that my nephew Claude, in addition to playing football, is a student of the ancient Stoics. His favorite is Marcus Aurelius, a Stoic philosopher but also a Roman Emperor from 161 to 180 AD. According to Wikipedia, Marcus Aurelius was one of the five “Good Emperors,” and the last emperor of the Pax Romana, a period of relative peace, calm and stability for the Roman Empire. Marcus and the Stoics believed that the practice of virtue is enough to achieve eudaimonia: a well-lived life. Marcus Aurelius also unknowingly left us with several investment tips that can help us through the emotional roller coaster that investing can often be:

“You have power over your mind, not outside events. Realize this, and you will find strength.”

“The universe is change; life itself is but what you deem it.”

“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”

I hope you’ll take those wise words with you into the new year and that they’ll give you resilience in your investing and your everyday life.

From all of us at Bragg Financial, thank you for your trust and Happy New Year!

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.