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January 03, 2024

2023 4th Quarter Client Letter – Taking Stock After A Year of Surprising Macro and Market Resilience

By Will Klein, CFA

Quarterly Investment Commentary

Lessons from the Recession That Wasn’t 

This time last year, there was a widespread consensus among economists and investment strategists that the US was careening towards a recession in 2023. Today, those predictions have proven wrong. Healthy economic growth and moderating inflation suggest the US economy might be on a soft-landing trajectory. That unexpected macro resilience helped to power a ~27% surge in the S&P 500 in 2023, pushing that index to end the year near its record high; this is always an opportune moment to reflect and plan for the year ahead. So, we’ve revisited the factors that allowed the US to defy recession forecasts last year and considered what next year could have in store.  

Coming into 2023, most recession predictions shared a common story: inflation was out of control, and the Fed was committed to reigning it in by hiking interest rates until something in the economy broke. We hit most of those milestones over the first half of the year: the Fed hiked interest rates up to their highest levels since 2001. That triggered a banking crisis, with Silicon Valley Bank, Signature Bank, First Republic, and Credit Suisse failing in rapid succession. However, before that banking crisis could push us into a recession, the Fed, FDIC, and Treasury intervened, stabilizing the financial system. Those interventions, paired with surprisingly steady consumer spending, were enough to avert a recession, buying us extra time for inflation to moderate and growth to normalize.  

There are a couple of takeaways from that story. Firstly, the Fed continues to be committed to limiting financial sector stress. Secondly, it’s dangerous to bet against the American consumer. Despite inflationary pressures, moderating wage growth, and the depletion of pandemic-era savings, US households continued to spend through 2023. Lastly, and most importantly, the crowded consensus is still a dangerous place for investors. That last maxim informs our outlook for 2024.  

Today, there’s a growing consensus that we’re on track for a soft landing, and the Fed will be able to cut interest rates while the economy grows through 2024. While that outlook is credible, recent experience underscores how quickly the macro and market landscape can change, and how dangerous it is to lean into a market consensus. So, we’re striving to stay balanced in the face of that growing market optimism by maintaining a through-cycle focus within clients’ equity portfolios, maintaining a defensive tilt in fixed income portfolios, and focusing on diversification. Those portfolio construction principles should help you weather the macro and market cycle, whatever 2024 brings. 

CY23 and 4Q23 Market Performance 

The Fed signaled a growing appetite for interest rate cuts over the fourth quarter. Hints at a Fed pivot sent 10-year US treasury rates down from 5% to 4%, driving equity and fixed income markets higher in lockstep. That strong finish pushed equity and fixed income investors to end the year with healthy total returns. Over the full year, a 60% MSCI ACWI Global Equity / 40% Bloomberg Global Aggregate Fixed Income asset allocation index returned 15.4%. That marked the strongest calendar year performance for that asset allocation index since 2019.  

Within equity markets, our US focus helped to drive strong relative performance as US stocks led international markets higher. Meanwhile, within fixed income markets, our short duration bond-focus helped to mute the impact of extreme inflation and Fed rate hikes over the first half of the year but was less significant over the 4th quarter.  

Equity Strategy Highlight 

While we didn’t foresee 2023’s supportive macro environment, we were well positioned for that upside surprise. Most significantly, our strategy of staying the course within US equities paid dividends as core holdings like Microsoft, Amazon, and Blackstone benefited from macro resilience. That aligned with a core tenet of our investment philosophy: we work to look past the peaks and troughs of the business cycle to understand companies’ through-cycle potential. Our investment in (AMZN), the ecommerce and cloud computing titan, helps illustrate that long-term focus. 

Amazon’s long-termism is deeply ingrained in the company’s DNA. Jeff Bezos laid out that philosophy in his first letter to shareholders in 1997, where he stated:  

A fundamental measure of our success will be the shareholder value we create over the long term… We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. 

Over the 26 years since Bezos published that letter, Amazon has delivered on that promise. While Wall Street’s view on the company has fluctuated, Amazon’s leadership—first under Jeff Bezos, now under Andy Jassy—has continuously reinvested in improving its competitive position in core markets like ecommerce and cloud computing through the business cycle.  

When we first added Amazon to portfolios in 2014, our thesis was simple: management’s commitment to building market leadership in secularly growing industries through the cycle would support long-term value creation. That has borne out over the last nine years, as Amazon has grown its ecommerce gross merchandise volume to an estimated >$700B while building out a shipping platform that’s bigger than FedEx. Simultaneously, its investment in its cloud computing platform, Amazon Web Services (AWS), solidified its leadership in that fast-growing tech industry. Moreover, despite a slowdown in demand in 2022 and the first half of 2023, Amazon continued to invest in those businesses. That decision to play offense while competitors were playing defense is now boosting profit margins and helping the company defend market share as demand inflects in those markets.  

Amazon’s long-term philosophy, through-cycle capital allocation framework, and strong competitive position in the ecommerce and cloud computing industries should continue to support value creation through the business cycle. So, despite the cyclicality of those businesses, we believe that the tech leader will remain an attractive core holding long term. 


One of the biggest lessons from 2023 has been how risky it can be to follow the consensus. That was on display last year when bearish investors missed out on strong market returns. It could hold again this year, as investors embrace the consensus the US is headed for an economic soft landing, despite risks to that outlook. While we will refrain from offering bold predictions for the new year, we continue to focus on building diversified portfolios that can deliver long-term returns whatever surprises the market cycle brings.  

We believe the core tenets of our investment approach will continue to add value in this unpredictable environment. Specifically, we believe US equities continue to represent an appropriate core allocation for most clients and that focusing on portfolio companies’ through-cycle value creation drivers will be key in navigating this uncertain equity market. Similarly, we believe higher-quality fixed income will continue to play a role in portfolios. Lastly, we will continue to look for opportunities to diversify around those core portfolio building blocks with allocations to cash, real assets, and alternatives.  

We wish you all the best for the New Year. As always, please do not hesitate to reach out if you have any questions about these market themes or your portfolio.


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