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Stembrook Market Review - Fourth Quarter 2023 Thumbnail

Stembrook Market Review - Fourth Quarter 2023

Market Updates

Just reading the headlines, one would not necessarily have assumed that 2024 was a strong year for stock market returns. Early on, many economists forecasted a recession before the end of the year, citing stubbornly high inflation and the Fed having to continue to increase interest rates, and ultimately slowing economic growth. Rates went up, but unemployment remained low and the U.S. economy continued to grow. A banking crises began in March with concerns about the solvency of regional banks after a few banks failed in a very short period of time. This briefly shook markets, but did not have a lasting impact at a high level. The ongoing conflict between Russia and Ukraine as well as the Israel-Hamas war are concerning on a personal and geopolitical level, but had very little impact on market returns. Despite all of these negative developments, global stocks were up 22.2%.1 As highlighted in our previous note from the second quarter of 2023, this strong performance was driven primarily by returns of mega-cap names in the US. Commonly known as the Magnificent Seven, this group of stocks, which comprises 26% of the S&P 500, contributed 16.4 percentage points of the performance while the rest of the US market contributed to 9.9 percentage points of the 26.29% return of the S&P 500.2

As we we enter 2024, many of the concerns that weighed on markets in 2023 still exist. Market participants are pricing in the US avoiding a recession (soft landing), but this is not guaranteed. The additional uncertainty of an upcoming presidential election in November will almost certainly keep market participants on edge. As we saw in 2023, signs of uncertainty don't imply that investors should abandon equity markets. It is important to keep in mind that fundamentals tend to be a good indicator of future returns over the long run. The forward price to earnings (P/E) ratio on the Magnificent Seven stocks is 31.2, while the overall market is 19.7. If you remove these stocks from the S&P 500, forward P/E ratio is 17.6, which is a reasonable level.2 While we have maintained expsoure to the Magnificent Seven stocks, we prefer stocks with lower valuations over the long-term. There are parts of the market, both within the United States and abroad, where we are finding value. 

Magnificent Seven Performance

After an extremely weak year in 2022, U.S. Megacap stocks bounced back in 2023.

Our proprietary models forecast long-term, pre-tax returns ranging from 3% to 4% for fixed income-like asset classes and 9% to 11% for equity-like asset classes (see Expected Market Returns and Risks table). We maintain target weight allocations to equities and fixed income. Our more detailed observations and current portfolio positioning are outlined in the following comments. 

Expected Market Returns and Risks 7-10 Year Horizon

A sampling of return expectations produced by our models. Expected returns are projections and are not guaranteed.

Historical Market Returns

Historical market returns as of December 31st, 2023. Note that looking backwards at recent returns is not a reliable method of predicting future returns. 

Yields Across Asset Classes

Yields are an indicator of future returns. Orange dots show current yields, blue bars show historical ranges.

 Economic Backdrop

  • In their most recent October 2023 release, the IMF projected that global economies would grow at a slower, 2.9% rate in 2024 adjusted for inflation. Which is significantly lower than the historical average growth rate of 3.8% since the year 2000.3
  • Slow economic growth is expected to continue in emerging markets as well. The IMF expects these economies to continue to grow by 4% in 2024, maintaining the same pace as in 2023. India remains a bright spot in the emerging markets, as the economy is expected to grow at a 6.3% rate in 2024.3
  • Inflation is beginning to cool on a global level as most central banks have enacted tighter monetary policies. While remaining high by recent standards, global inflation is expected to fall to 5.8 in 2024 from a level of 6.9% in 2023.3
  • Inflation in the U.S. continues to slowly decline. The inflation rate dropped to 3.4% year-over-year and has remained in the 3-3.7% range over the last 3 quarters.4 
  • At their December meeting, the U.S. Federal Reserve committed to keeping inflation low and announced that they will keep the target federal funds rate of 5.25% - 5.5% in order to keep downward pressure on prices and achieve their 2% inflation target and will continue to assess additional information and its implications for monetary policy. In addition, they announced they will continue to reduce holdings in Treasuries, agency debt and agency mortgage-backed securities. 
  • The federal debt in the United States continues to climb, reaching $34 trillion, after the government ran higher than normal deficits from 2020-2023.5 Despite this high level of debt, demand for Treasuries from investors outside of the U.S. remains strong. While the debt level is not an immediate problem, it is going to be an issue that has to be addressed in coming years, especially if interest rates remain elevated for a longer period of time. 


  • The dollar traded within a tight, 7% range throughout the year and ended down by -3% over the course of 2023.6


  • As mentioned earlier, 2023 was a very strong year for stocks, but the range of returns between different sectors and countries varied quite a bit.
  • After an off year in 2022, tech stocks rallied back, up 55.1% in 2023.7
  • Non-U.S developed stocks were up by 18.2% over the course of the year.8
  • Emerging markets stocks were some of the weakest relative performers of the year, but still finished up 9.8%.9
  • Despite solvency concerns regarding regional banks earlier in the years, financial stocks ended the year up 11.5%.10

Fixed Income

  • After a slow start to the year following a historically challenging year in 2022, bonds bounced back in the final months of 2023 to end the year up 5.5%.11
  • Municipal bonds also experienced a strong year in terms of performance, up 5.2%.12
  • High Yield bonds continued to deliver above average returns, up 13.4% for the year.13
  • Non-U.S. bonds also experienced better returns, up 5.8%.14

Global Asset Class Returns

Returns are arranged in columns, by year. Each color represents a different asset class. Each year, the leaders and laggards tend to shift. Diversification across a range of asset classes can smooth returns and enhance growth.

Current Positioning

  • Out of an abundance of caution, we shifted our cash in traded money market funds from a prime fund (holds a combination of commercial paper, repurchase agreements, CDs and Treasuries) to one that holds only Treasuries, backed by the full faith and credit of the U.S. government. We sacrificed very little in yield by making this transition. 
  • We have sold our inflation-linked bond positions for taxable and tax-deferred investors as the yields have become less attractive than nominal Treasuries on a relative basis.
  • We maintain our neutral duration position in the fixed income portfolio as interest rates have risen to levels that are closer to historical averages.
  • We maintain our overweight to developed non-U.S. and emerging market equities, where valuations and long-term return potential remain attractive. 
  • We also maintain our underweight to large cap U.S. equities, which helped over the trailing twelve months.
  • We favor lower priced, value-oriented equities, both in the U.S. and abroad, which tend to outperform the broad market over time, with less volatility. While these stocks did not keep pace with some of the tech oriented growth names in 2023, we are excited about the return potential going forward.

We continue to focus our efforts on helping you meet your financial objectives by following our disciplined investment approach. Our approach uses return and risk models, incorporating fundamental valuations and tax-efficient strategies. This investment discipline is tailored to your individual situation in our continuing effort to craft and implement your customized investment solution. 

As we approach the tax filing deadline, please do not hesitate to reach out if you or your tax advisor have any questions regarding year reporting. In addition, you have until your tax filing date to making a contribution to your IRA or Roth IRA for the 2023 tax year. If you would like to discuss this, please reach out to Peter or Tom.

As always, we thank you for placing your trust in our investment management and advice and welcome your questions and comments at any time.

Peter & Tom


Endnotes and Sources:


  1. Morningstar: MSCI ACWI All Cap NR USD. 12/31/22-12/31/23.
  2. Southeastern Asset Management. 
  3. IMF World Economic Outlook: October 2023.
  4.  Bureau of Labor Statistics: CPI For All Urban Consumers. 12/31/23.
  5. U.S. Treasury as of 1/20/24.
  6. Barchart: $DXY—U.S. Dollar Index. 12/31/22-12/31/23.
  7. Morningstar: NASDAQ 100 TR. 12/31/22-12/31/23.
  8. Morningstar: MSCIE EAFE NR USD. 12/31/22-12/31/23.
  9. Morningstar: MSCI EM NR USD. 12/31/22-12/31/23.
  10. Morningstar:: S&P 500 Financials Total Return. 12/31/22-12/31/23.
  11. Morningstar: Bloomberg US Aggregate Bond Total Return. 12/31/22-12/31/23.
  12. Morningstar: S&P Intermediate Term National AMT Free Municipal Bond Index Total Return. 12/31/22-12/31/23.
  13. Morningstar: Bloomberg US Corporate High Yield TR USD. 12/31/22-12/31/23.
  14. Morningstar: FTSE WGBI NonUSD. 12/31/22-12/31/23. .


Magnificent Seven Performance r: As of 12/31/23. 

Source: Morningstar, Southeastern Asset Management, Stembrook Research. 

Expected Market Returns and Risks, 7-10 Year Horizon: As of 12/31/23.

Source: Stembrook Research.

(1) Volatility is measured in terms of Standard Deviation. Standard deviation is the statistical measurement of dispersion about an average, which depicts how widely a stock or portfolio’s returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When an investment has a high standard deviation, the predicted range of performance is wide, implying greater volatility. If an investment’s returns follow a normal distribution, then approximately 68 percent of the time they will fall within one standard deviation of the mean return of the investment, and 95 percent of the time within two standard deviations. For example, for a portfolio with a mean annual return of 10 percent and a standard deviation of two percent, you would expect the return to be between 8 and 12 percent about 68 percent of the time, and between 6 and 14 percent about 95 percent of the time. Source: Morningstar.

Historical Market Returns: As 12/31/23.

Source: Morningstar, Stembrook Research.

Indices: Bloomberg Barclays U.S Treasury Bills 1-3 Month Total Return, Bloomberg Barclays Municipal Bond 5 Year (4-6) Total Return, Bloomberg Barclays U.S. Aggregate Bond Total Return, Bloomberg Barclays U.S. Corporate High Yield Total Return, FTSE All Equity REIT Total Return, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Total Return, MSCI EM (Emerging Markets) Total Return, Consumer Price Index – U.S., S&P 10 Year U.S. TIPS Total Return, Bloomberg Commodity (Total Return) Index.

Yields Across Asset Classes: As of 12/31/23.

Sources: Cash Equivalents Yields since March 1976. Ibbotson, Federal Reserve Bank, Thomson Reuters, Municipal Bond Yields since March 1988. Barclays Capital, Charles Schwab, BofA Merrill Lynch, Standard & Poor's/Investortools Municipal Bond Indices, Investment Grade Bond Yields since March 1976. Barclays Capital, High Yield since December 1984. BofA Merrill Lynch, Barclays Capital, Real Estate (Public) Earnings Yield since March 1976. NAREIT all Equity, Large Cap U.S. Equity Earnings Yield since March 1976. Standard & Poor's, BARRA, Mid Cap U.S. Equity Earnings Yield since June 1991. Standard & Poor's, BARRA, Small Cap U.S. Equity Earnings Yield since December 1993. Standard & Poor’s, BARRA, Developed Europe Equity Earnings Yield since March 1976. MSCI Europe, Standard & Poor's Europe 350, Developed Pacific Equity Earnings Yield since March 1976. MSCI Pacific, S&P/Citi PMI Asia Pacific, S&P Asia 50, Emerging Market Equity Earnings Yield since December 1998, Inflation-Linked Bond Real Yield to Maturity since March 1997. Citi Yield Book, Federal Reserve Bank. Note: Yields are not perfect predictors of future returns and should not be used in isolation.

Global Asset Class Returns: As of 12/31/23.

Source: Thomson Reuters, Bloomberg, Morningstar, Stembrook Research.

Indices: Consumer Price Index – US, U.S. 30-Day Treasury Bills, Bloomberg Barclays U.S. Treasury Bills: 1-3 Month Index, Citigroup Inflation-Linked Index, S&P 10 Year US TIPS Index, Bloomberg Barclays U.S. Aggregate Bond Index, BofA Merrill Lynch U.S. High Yield Cash Pay, Bloomberg Barclays U.S. Corporate High Yield Index, Dow Jones Wilshire REIT Index, FTSE All Equity REIT Index, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Index, MSCI EM (Emerging Markets) Index, Dow Jones AIG Commodity (Totl Ret) Index, Bloomberg Commodity Index.


This material is intended to inform you of products and services offered by Stembrook Asset Management, LLC (“Stembrook”). Stembrook is a New Jersey Registered Investment Advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. The opinions, estimates, and investment strategies and views expressed in this document constitute the judgment of Stembrook, based on current market conditions and are subject to change without notice. The investment strategies stated here may differ from those expressed for other purposes or in other context.

 Past performance is not indicative of future results.

The obligations and securities sold, offered, or recommended are not deposits and are not insured by the FDIC, the Federal Reserve Bank, or any governmental agency.

The views and strategies described herein may not be suitable for all investors. This material is presented with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax adviser concerning such matters. 

Important note regarding Stembrook’s capital market expectations.

The capital market expectations developed by Stembrook Asset Management are estimates of both a central tendency of asset class behavior and a probable range of asset class behavior over a long-term horizon. These estimates are one of many inputs used in the portfolio construction process, and should not be used independently. These expectations should not be construed as the returns that will be achieved, but merely those that may be achieved if certain assumptions hold true. Also note that each client's portfolio may differ given specific goals and constraints applied to the portfolio construction process. 

Additional information is available upon request.