2023 Market in Review with Garrett Waters

November 20, 2023

2023 Market in Review with Garrett Waters

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2023 Market in Review with Garrett Waters Show Notes

For the second time in 2023, Anchor Capital CEO and Portfolio Manager Garrett Waters is joining Dean Barber on The Guided Retirement Show. Earlier this year, Garrett and Dean discussed investment risk for 2023. Now that 2023 is coming to a close, Garrett is returning to do a 2023 market year in review and 2024 market outlook. He and Dean will talk about the stock market, bond market, and economy.

In this podcast interview, you’ll learn:

  • The Ups and Downs of Liquidity in 2023
  • The S&P 500 and NASDAQ Entered Correction Territory in Q3, but Have Since Bounced Back
  • Federal Reserve Plans to Keep Rates Higher for Longer
  • Some of the Economic Impact of the Wars in Ukraine and Gaza
  • The 10-year Treasury Has Experienced A Lot of Volatility

Some Background Info About Garret and Anchor Capital

Before Garrett and Dean do their 2023 market year in review and 2024 market outlook, let’s share a little bit more about Garrett. Anchor Capital runs three risk-managed mutual funds. All Garrett and his team focus on is risk management.

“We feel like if we get the risk right, we’ll get the return right.” – Garrett Waters

Garrett began his career with J.P. Morgan in New York before being recruited to Barclays Global Investors, where he helped launch their iShares. That gave him perspectives of active and passive management, which has paved the way for how Anchor Capital operates today. Anchor Capital doesn’t use single names in their portfolio. They only use ETFs, which they dynamically hedge with futures around their core positions.

Garrett and his team like to look at markets from the top down. They look at their three mutual funds in three timeframes—short-term (a day to a week), intermediate-term (three to six months), and long-term (six to 12 months). That gives them the best risk-adjusted performance over time.

What’s Catching Garrett’s Eye for His 2023 Market Year in Review and 2024 Market Outlook?

We’re going to kick off Garrett’s 2023 market year in review with what’s been happening in the stock market. The cap-weighted S&P 500 has been in the 10%-15% range, but the equal-weighted is negative year-to-date. A lot of people aren’t aware of the equal-weighted index because the cap-weighted index is what is broadcast all over television, the internet, etc.

A False Sense of Security Surrounding the Stock Market

Dean has referenced the key differences between the S&P 500 cap-weighted and equal-weighted index throughout the year in his Monthly Economic Updates. Garrett and his team have been focusing on the long-term price appreciation and avoid the short-term price dislocations that can shake people out of their plans.

Let’s look back on what’s transpired in the S&P 500 during 2023. We started off the year fairly strong, but then there were a few large bank failures. The S&P 500 was approaching negative territory in March. But the story of this market review in 2023 is liquidity.

“The whole market’s return basically occurred from March 15 to July 31. That was because of the liquidity program that the Fed put in place to save those banks.” – Garrett Waters

The Liquidity Rollercoaster

The Fed was saying they were going to raise rates and dry up liquidity, but you can see that they sparked it again to save the economy and save the banks. People were going to lose all their deposits and money because the banks had deposits in excess of the FDIC insurance rate of $250,000. That’s why Garrett believes that the stepped in to secure those depositors and keep the market from going off a cliff.

But since July 31, liquidity has started to dry up and the market has whittled its way down and experienced more volatility. Garrett is curious to see how the final few weeks of 2023 play out to round out the 2023 market year in review.

“We’ll see where the push is. We got through the earnings season. We’re seeing now that the rates are really starting to have an impact on investors’ portfolios.” – Garrett Waters

Had the Fed not stepped in with more liquidity in the middle of March, Garrett believes we would’ve seen a much different outcome despite losing a few very large banks in the meantime.

Keeping Rates Higher for Longer

The S&P 500 and the NASDAQ went into correction territory in the third quarter, which means that they dropped 10% or more from previous highs. However, we’ve since seen some reprieve.

The markets had a very strong start to November. Is that a result of the Fed taking a pause with raising rates or is that a sign that maybe the Fed is done and the markets take off. The Fed had said that they don’t plan to raise rates, but plan to keep them higher for longer and continue with quantitative tightening.

“(Higher for longer) means companies that have been limping along and refinancing at very low rates are no longer going to have that option. That’s what we’re seeing from the regional banks.” – Garrett Waters

The Impact on Commercial Real Estate

The regional banks also have the highest exposure to commercial real estate. Those loans are all going to need to be refinanced the longer the Fed holds rates higher. Garrett says that the Fed is going to have rates higher for longer because they weren’t getting the reaction they needed from the first rate hikes.

Leaving rates higher gives companies less and less ability to keep motoring along on a very low debt payment. That means they need to go to the market, and maybe the market won’t loan them any money this time. Maybe their balance sheet won’t look quite as good and rates will be much higher. That makes it harder to be more profitable, which generally leads to layoffs.

Speaking of which, there was also an unpleasant recent jobs report that’s leading a lot of people to think that the Fed will start cutting rates. How will things play out as these economic factors add up?

Looking Outside of the Large Caps

The regional banks are still in a crash, as they’re down about 30% on the year. The worry that people felt in March hasn’t disappeared. It’s actually sinking into a deeper drawdown. You’re also seeing that across the small caps.

“People are so focused on the Magnificent Seven stocks that they’re taking their eyes off a lot of different markets that we watch. Emerging markets are approaching negative for the year. Europe is in a recession and approaching negative for the year. So, how long will we be protected?” – Garrett Waters

The bottom line is that while the large cap stocks are still hanging in there, the small caps and mid caps have really been beaten up. There is a lot to break down, but there is a lot of opportunity across different asset classes instead of just focusing on the S&P 500.

Assessing Some Price-to-Earnings Ratios

As a part of our 2023 market year in review, we also want to look at the price dislocation that’s occurring right now from the Magnificent Seven compared to the rest of the market. There are some mega cap companies, especially the oil giants, that have price-to-earnings ratios of 10 or below. But then you have Nvidia over 100 and Amazon in the 70s.

You would expect the Magnificent Seven to do well because of the liquidity that was injected into the system. That’s where the money is going to flow. However…

 “You’ve already seen that liquidity starting to dry up outside the Magnificent Seven. You’ll probably start to see those stocks follow eventually if it gets more serious.” – Garrett Waters

The Wars in Gaza and Ukraine

Our 2023 market year in review also can’t be complete without looking at what has happened outside of the U.S. We specifically want to address the wars in Gaza and Ukraine. We saw Russia get isolated from doing business with others very quickly.

Both Gaza and Ukraine are focused on energy. People anticipated oil shortages in the Middle East. What Garrett finds interesting now is that there’s a short pump in the price of oil, and oil is starting to come off.

“What should you be thinking in that scenario? You should be thinking that demand is coming down. It’s not so much that there are shortages. It’s that there’s no demand for the product or oil.” – Garrett Waters

Why is that problematic? That means that our goods and services aren’t being moved at the pace they were being moved. That directly affects China, Europe, and the United States. The goal is for those transports to be humming and the use of oil increasing because that means people are building and transporting goods and services.

It’s becoming more of a function of demand than just the function on the commodity. You’re starting to see Russia and Saudi Arabia keep their production cuts elevated and potentially add more cuts because demand is falling off. They want to keep the price high.

What’s in Store for Fixed Income and Equities Going into 2024?

Let’s shift gears in our 2023 market year in review back to fixed income and equities. What’s in store for them going into 2024? Will there still be a headwind for fixed income or will it stabilize and lead to a tailwind over the next 18-24 months? And what about equities?

Let’s start with equities. Garrett believes there will be a big headwind for equities. Remember that everything is a function of rates. That lag effect we talked about with rates is going to start having an impact on equities and fixed income. That’s becoming evident in real estate and financials.

So, what does that mean for fixed income? People think that it’s peaked and that the Fed is going to keep it where it is. Is it going to be a function of demand? How much do people want bonds over stocks?

“As stocks start to fall, their dividend yields might become more attractive. But right now, fixed income holds the upper hand.” – Garrett Waters

A Ton of Volatility with the 10-Year Treasury

In the third quarter, we saw the 10-year treasury move from 4% to 5%. Now, it’s back down to around 4.5%. So, there was a huge headwind for fixed income in the third quarter, but the Fed doesn’t set the 10-year treasury rate. What’s causing that volatility with the 10-year yield? That’s a hard question to answer.

“When we’re looking at fixed income, those swings you’re seeing are a function of volatility. They’re also a function of people looking out 10 years in 30 years and wanting to be compensated for the risk. They’re going to ask for more yield.” – Garrett Waters

We saw a big move in those yields because people were looking at what the government was facing—too much debt and a potential shutdown looming. As there is more certainty and credibility from the Fed, which have been lacking, there will be more volatility in rates. Garrett says that will be hard to navigate for a lot of people who are dependent on rates for borrowing costs.

How Garrett Assesses Risk

As a portfolio manager, Garrett always evaluates risk. When risk is elevated, Garrett and his team have the luxury of not being directionally set. They don’t just bet that things are going to go up or they don’t make money.

When looking at traditional equities, they must go up for investors to make money. With fixed income, investors expect to collect coupons and have very low volatility. At Anchor Capital, Garrett and his team can transition and be dynamic with their portfolios, so it’s a growth environment.

“We can position our portfolios more in line with equity growth. When equities are positioning to do worse, we can hedge those positions, get more in line, and make money on the downside.” – Garrett Waters

Final Thoughts for Our 2023 Market Year in Review

Volatility can create a lot of nervousness and uncertainty specifically for retirees. When volatility approaches, you tend to see it most of the times in stocks. Garrett says the best way to limit that volatility is putting a risk management strategy between your stocks and bonds.

“It will smooth out your return and give you a much smoother through retirement. As much as we like to say that we’re discipline, when that volatility starts to come up, investors jump off a well-defined plan that an advisor has set to work.” – Garrett Waters

That causes investors to be out of sync with their plans. Then, they don’t know when to jump back in and they wind up missing a lot of great return that they would’ve had if they stuck with their plans.

We don’t want that to be the case for you. If you have any questions about what Garrett and Dean covered in our 2023 market year in review and 2024 market outlook, we want to hear from you. Our team at Modern Wealth wants you to have a financial plan that can help you plan for the uncertainty of market risk and various other types of risk that can impact your retirement. You can start a conversation with us below to begin to see what that personalized plan could look like for you.

Schedule a Meeting

We want to thank Garrett again for joining Dean on The Guided Retirement Show. That’s a wrap on Episode 99 and make sure to tune in for Episode 100! You won’t want to miss it.

Watch Guide | 2023 Market in Review with Garrett Waters

00:00 – Introduction
– Garrett’s Background
– Equities and Market Risk
– Price Dislocation, the Mag 7, and the Fed
– Gaza and Ukraine
– Fixed Income and the Fed
15:48 – What Do You Do Now?
– Parting Wisdom from Garrett

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC, does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.