As the curtain fell on 2023, investors applauded a positive end to the year for the financial markets. A growing consensus that the Federal Reserve (the Fed) is done raising interest rates and will pivot to cutting rates by mid-2024 fueled a sharp drop in Treasury yields and rekindled investor appetite for equities in the last two months of the year. However, we aren’t ready to pop the champagne just yet. While favorable markets were cause for jubilance, the world is still reeling from the ongoing conflicts in Israel, Gaza, and Ukraine. The humanitarian toll from these events is staggering, and our collective hope is for peace in the world.
Looking ahead, we are monitoring the impact the wars have on the global economy; we are following the political environment at home and assessing the candidates’ policies ahead of the 2024 election; and we are watching company earnings in light of a dynamic and challenging economic environment. We have a balanced perspective, believing that the economy is stable for now and inflation is contained. Yet we know the impact of higher interest rates is still working through various sectors.
The Economy: Inflation, Soft Landing, and the Fed’s Highwire Act
The inflationary tide appeared to definitively shift by the end of 2023 following two long, downbeat years for consumers. In November, the personal consumption expenditures (PCE) price index, the Fed's favored inflation gauge, showed a 0.1% decrease month over month, marking the first decline since April 2020. Year over year, prices showed a 2.6% increase, closely aligning with the Fed's 2% target.1 After holding the benchmark Federal Funds rate steady in the 5.25-5.50% range at three consecutive meetings, the central bank indicated at its December meeting that it plans to cut rates in 2024 by as much as 0.75%.2 This shift, if managed effectively, could pave the way for a soft landing, which would be only the second time since 1965 that such a threading-of-the-needle has been successfully achieved by the central bank.3
Even though the much-talked-about recession of 2023 never materialized, it is likely that the U.S. economy has been experiencing a rolling recession since 2021. It began with softening in the most rate-sensitive sector, housing. In 2022, existing home sales dipped to their lowest levels since the height of the foreclosure crisis in 2010 and mortgage demand dropped to lows not seen in over two decades.4 Later in the year, the consumer and technology sectors faced inventory gluts and layoffs as companies worked to absorb excess capacity caused by shifting consumer preferences and the work-from-anywhere movement. In 2023, we started to see recovery in the housing, technology, and consumer sectors as bank profitability suffered. The Fed stepped in with a new Bank Term Funding Program (BTFP), which stabilized the shaky sector. Most recently, commercial real estate has been under pressure with record high vacancy above 13% in the office sector.5
Source: Goldman Sachs Asset Management. As of September 29, 2023. For illustrative purposes only.
All of this underscores that the resilience of the U.S. economy in the face of 11 consecutive interest-rate hikes over the last 23 months has been nothing short of impressive. To cap off 2023, the labor market continued to be a steady ship in choppy economic waters, buoying consumers and businesses through the waves of rising prices and consistently tightened monetary conditions. Overall, U.S. economic growth beat expectations in the third quarter of the year7, and some badly hit parts of the economy, such as housing, began to show signs of a recovery.8 Despite these encouraging signs, risks remain. The Fed’s pivot to rate cuts and a subsequent soft landing requires continued progress on lowering inflation. Furthermore, a spike in energy prices, a rapid reacceleration in economic growth, or Fed policy that proves to be too heavy-handed are all factors that could derail the Goldilocks scenario and put the central bank back in a very difficult position.
The Markets: Lower Expectations, Higher Returns
The year concluded with an excellent quarter for stocks. The narrative for the initial nine months of 2023 revolved around the dominance of the mega-cap "Magnificent 7" stocks (ordered by market cap: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) propelling market gains while the rest of the S&P 500 was flat or down. Together these stocks accounted for 70% of the S&P 500 gains in 2023. While this seems anomalous, the market gains are concentrated where earnings growth is. The Magnificent Seven are expected to post a 39.5% aggregate earnings increase in 2023, against a 2.6% decline for the rest of the S&P 500, according to LSEG data.9
From a valuation perspective, the broader market seems cheap relative to its high-flying Magnificent 7 peers (19.8x vs. 33.6x). Yet investors need to believe that earnings will grow to gain confidence in the stocks. The final months witnessed broader market participation as the Fed hinted, and then signaled, at a pivot. Many of the interest-rate-sensitive sectors saw a bounce with investors believing that lower rates will lead to stronger profits for these companies. The S&P 500 Equal Weight Index outperformed the S&P 500 market-cap weighted index in December, marking the first time it had done so in 2023.10
In fixed-income securities, signs of economic slowdown and a decline in inflation propelled the U.S. bond market to its most significant gain since the mid-1980s. Yields tumbled sharply on speculation that the Fed might cut its benchmark rate by more than a whole percentage point in 2024, beginning in the first half of the year. The Bloomberg U.S. Aggregate Bond finished the year with an impressive 5% gain. Yields on the 10-year U.S. Treasury, which had exceeded 5% in October for the first time since 2007, retreated below 4% by the end of the year in response to the Fed's more dovish language.
Our Gameplan for 2024 and Beyond
As the late, great Charlie Munger said, “The big money is not in the buying or the selling, but in the waiting,” and we couldn’t agree more. We have taken proactive steps over the last 12 months to position client portfolios in a way that we believe aligns with our long-term approach and positions clients to do reasonably well through the ups and downs of future business cycles.
In the stock portion of client portfolios, our focus is on investing directly in individual companies with talented leadership teams, strong balance sheets, and reasonable growth potential. To complement these holdings, we have been seeking greater diversification and broader exposure to small-cap companies that could benefit as market strength broadens to more sectors. On the fixed-income side, we are preparing for a decline in bond yields by creating bond ladders and reinvesting bond maturities at higher rates. By extending duration, the aim is to capture today's yields over the next few years as yields are expected to fall.
At the outset of 2023, few could have predicted the strength displayed by both the economy and the market. This unpredictability, both on the upside and downside, underscores the importance of staying invested and maintaining a degree of humility in navigating the markets. In this dynamic environment, we encourage clients to reach out for discussions about any shifts in their financial situations or questions about their portfolios.
 Bureau of Economic Analysis https://www.bea.gov/news/2023/personal-income-and-outlays-november-2023
 Federal Reserve Board and Federal Open Market Committee, Summary of Economic Projections, December 12-13 FOMC meeting
 Landings, Soft and Hard: The Federal Reserve, 1965–2022, Alan Blinder, Journal of Economic Perspectives, Winter 2023
 Source: Goldman Sachs Asset Management. As of September 29, 2023. For illustrative purposes only.
 Bureau of Economic Analysis https://www.bea.gov/news/2023/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-and-gdp
 The U.S. Census Bureau and the U.S. Department of Housing and Urban Development – Monthly New Residential Construction, November 2023
Improved Financial Strategies for Our Clients
“Wealth is the ability to fully experience life.” Henry David Thoreau
Over the years, our conversations have broadened from how a stock has performed to how a client’s balance sheet has grown. Investments are core to what we do, but our clients also find value in understanding their financial picture. In the past 10 years, Obermeyer Wood has invested heavily in our team and our technology to provide you with a tailored financial strategy. In the same way a doctor provides a health exam, we probe into your financial health through our strategic process.
Financial planning helps put your goals into focus and charts a path for how to achieve them. Having a roadmap increases your confidence and can be a stress reliever. We aim to take something hard to understand and make it clearer. Planning is personalized to you – whether you’re trying to understand what “your number” is for retirement or how you should prioritize savings by accounts or answer how much you can gift to children and support grandchildren’s education.
Examples of how we can help you:
- Gain awareness around spending: This is ideal for someone in a new situation (e.g., following a divorce) or for a couple or individual who sees their balances staying static over time.
- Develop milestones for net worth: We provide counseling to ensure a couple is rowing in the same direction and you have balance between spending and saving. We help provide a framework for decision-making and put purpose behind your wealth.
- Focus on acute issues: We review your Social Security Benefits, bring in Medicare experts, review your tax return, discuss the pros and cons of insurance coverage, and help determine how to optimize gifting to charities and family.
In 2023, we relaunched our financial strategy process to make it result-oriented. Today’s process consists of four steps: discovery, feedback, recommendations, and ongoing support. In the beginning of the engagement, we walk through your income statement and explore your balance sheet. We uncover opportunities to defer taxes and simplify your financial life. Next, we host a working session where we reflect on what we see and share preliminary results. Third, we itemize clear recommendations and discuss how we can help implement them. The process is designed to create actionable steps to increase your wealth or further your goals. Last, we provide frequent check-ins to help you stay on track.
Our wealth management services are all-inclusive, and there is no additional cost for you to receive this valuable advice. We love engaging with you and look forward to our financial strategy conversations. Please reach out to your relationship manager if you are interested in learning more about developing your personalized financial strategy.
RETIREMENT: SKIP DINES
With conflicting emotions, but mostly profound gratitude, we announce the retirement of Skip Dines, Senior Vice President and Partner. Skip officially transitioned to an emeritus role at the end of December and will continue consulting with our executive team through 2024 on strategy and client advisory matters.
Skip has been an indispensable leader at Obermeyer Wood for 13 years, a trusted advisor to a wonderful group of clients, and part of Colorado’s investment advisory community for almost four decades. His relationships with some of our clients and professional contacts date to the mid-1980s. He has also served as a mentor and friend to so many of our team members and professional colleagues during his career.
In anticipation of this transition, Skip and our entire team worked closely to provide clients with seamless support and continuity, including hiring new client advisors. Our commitment to expanding our team has not only solidified our advisory and client service offerings but also broadened the spectrum of services we can offer our clients in the decades to come.
Please join us in thanking Skip for his unwavering dedication to Obermeyer Wood and the countless ways he’s enriched our lives and served our clients. While we miss his wit, wisdom, and decades of experience on a daily basis, we are grateful for his support and the legacy he leaves behind. We bid him a fond farewell and our very best wishes for a well-deserved retirement full of travel, hunting, skiing, fishing, and many other adventures.
If you have any questions about this transition, or if you would like to meet to review your financial situation, please don’t hesitate to contact our team at 970-925-8747 (Aspen) or 303-321-8188 (Denver).
Obermeyer Wood recently celebrated a major milestone for two of its first team members, Christine Goodendorf and Roger Hennefeld. They have been invaluable members of our team since both joined Wally Obermeyer over 25 years ago. Chris, who oversees our firm’s finance and business operations, joined Obermeyer in 1997. Roger, who joined shortly after in 1998, manages client relationships and oversees the firm’s trading operations, fixed income portfolio, and performance reporting.
Please join us in thanking both Chris and Roger for their dedication to the firm and the countless ways they’ve served our clients, fellow team members, and professional colleagues for the past 25 years.
Forbes and SHOOK Research recently announced America’s Top RIA Firms list, which recognizes the top 250 Registered Investment Advisors in the United States. Obermeyer Wood was ranked No. 22 in the country and was the only firm in Colorado to rank in the top 100. Forbes and SHOOK lauded this year’s winners for “providing a steady hand for clients and preserving their wealth over the long term.”
The ranking focuses on both quantitative and qualitative data used to choose the nation’s top firms. “When we meet with a firm or an advisor for a due diligence meeting, we are always thinking to ourselves, ‘Would we recommend this firm (or individual) to a friend or family member?’” SHOOK founder R.J. Shook noted. “Quality is always first.”
National honors like this one represent the hard work of our entire team. We’d also like to thank our clients for their partnership and trust, both of which make awards like this possible.