Learn more about setting your year on the right foot as we look back at what happened and try to get an idea of where equity markets and investors might experience returns in 2024 with Shane Tenny, CFP®.
Transcript:
SHANE TENNY: Happy New Year! Shane Tenny, managing partner at Spaugh Damron Tenney, coming to you with four charts that I think are going to help set your year on the right foot as we look back at what happened and try to get an idea of where equity markets and investors might experience returns in 2024.
So, I want to start with one of the major themes of last year, and that is inflation and interest rates.
We all know the headlines over the last year and a half: high inflation, Federal Reserve working feverishly and diligently to try to stem the increase in inflation and at the same time be gentle with unemployment and gentle on equity markets. We know 2022 was one of the most difficult bear markets in recent memory. And so I want to take a minute and reflect a little bit on where we were and what's happened. So, with this said, let me take a minute and share our first diagram.
Now, this first diagram is one that I brought to you a year ago. So, at the beginning of 2023, I showed you this chart, which highlighted on the left how bad inflation was. We all know that in mid-2022, inflation had peaked at 9.1%. The Federal Reserve had already begun its aggressive campaign of raising interest rates to try and stem inflation. And at the beginning of 2023, I was highlighting for you this chart on the right, which shows equity market returns following peaks in inflation.
Now, we know that in 2022, when inflation was peaking, it was also one of the most difficult bear markets for stocks and bonds. And so a year ago, I was highlighting this diagram showing that in every circumstance except for the great recession of 2008, equity markets had posted positive returns twelve months after a peak in inflation. Of course, we didn't know a year ago what the returns would be twelve months after mid-2022. But I was bringing to you this information showing that the average equity market returns twelve months following a peak in inflation is 21.3%. And what happened?
Well, if we look at the chart completed through the end of last year, we know that inflation has dropped significantly, closing the year at about 3%, as illustrated in the red line on the left. And we see that the returns twelve months after 2022 were almost spot on with the average, you see at about 20.6%. And if we broaden our perspective to include all of the market's returns for 2023, we see that the equity market returns and the yellow box at the bottom right were 29.2%, as measured from inflation's peak in mid-2022. Now, that is not a prediction that we made. It is just a historical observation that we presented.
I never know what exactly the market is going to do over the next quarter, the next year, or even the next two years, but we can use history as a guide. As Mark Twain said, history doesn't repeat itself, but it does rhyme. It's important to bear in mind that the tool that the Federal Reserve used, and is using to help stem inflation is the federal funds rate, which they've been raising since early in 2022. The last Fed funds rate increase was July of 2023, and historically, the Fed has begun reducing interest rates ten and a half months following the last rate increase. That would put, based on historical measurements, the first rate decrease sometime in the second quarter of this year.
I don't know that that's going to happen. As the Fed would say, it's always data-dependent, but it is something to bear in mind. And the reason is because as interest rates begin to decrease, the cost of capital becomes less, and that often bodes well for equity market returns. However, an important caveat here. One of the benefits of rising interest rates has been the yield on money markets or high-yield savings accounts.
And so we're all benefiting from having our cash, our money markets, our high yield savings, growing at 4%. Bear in mind that party won't last forever. And as you can see here, going all the way back to the recession of Y two k from 2001 to 2002, we did see interest rates drop from about 6% to less than 2% in a matter of less than a year and a half. During the great recession of 708, we saw interest rates drop from about 5% to less than 2% in about 15 months. And so if or when the Federal Reserve begins to reduce interest rates, you should expect a rapid drop in the yield on your money market funds and, therefore, perhaps an opportunity to deploy that cash in a more appropriate investment strategy for long-term returns.
Now, with this said, I also want to talk about another theme that you are undoubtedly hearing a lot about as we head into 2024, and that is the presidential election. And while our portfolios are not invested in Washington or the White House or politics directly, it is interesting to look at historical trends of presidential election cycles. Historically, the market has always provided positive returns, more often than not, but they don't come equally through every quarter. And so we can see here that the first half of the year in presidential election years tends to be sluggish compared to the second half of the year. But it raises an interesting question for the investor.
For those with cash on hand, would you rather hold the cash until the second half of the year when returns are already higher? Or would you rather deploy the cash in the first half of the year before prices have increased? A question for you to discuss with your financial advisor, but one that is worth asking, and the final chart I want to share with you has to do with a big-picture view of equity markets. If we look at returns over nearly the last 100 years, let me ask you a question. How often does the market go down?
And how often does the market go up? Sometimes, it feels like a coin toss. A year like 2022 is down, a year like 2023 is up. It's just a 50-50 chance whether the market will be up or down this year. Well, as you reflect on the question, I want to bring you some data, because the fact of the matter is that equity markets in the last 98 years have only posted negative calendar year returns 26 times.
26 times out of 98 years, the market has been negative at all, and all the rest of the time, the market has been positive. This average return of 10% that we hear about all the time doesn't happen each and every year. In fact, there are only six years out of the last 98 where the market's even been up between eight and 12% at all. All the rest of the time, it's up higher or lower. And you can see here that there have been more years that have been up more than 20% than there have been negative years in their entirety.
2023 equity markets were up 26%, and it marked the 37th year out of the last 98. Over one-third of the time that, equity prices are up in double digits, more than 20%. Take a minute and just reflect on this chart as you look at the dispersion of positive returns in equity portfolios. It's a powerful chart, isn't it? So, what is the main takeaway?
The main takeaway I want to offer to you is that the best way to benefit from the perpetual positive compounding of long-term returns is to not interrupt its work. And with that, I'll bid you a happy new new year. And as always, if you have any questions at all, please don't hesitate to reach out. I'll see you back here next time.
