Welcome to December! We’ve officially turned the calendar to the final 31 days of the year (a month where many of our calendars are now filled with chocolate and treats!)

Hopefully you all enjoyed a nice Thanksgiving with your families and are ready for the conclusion of another action packed year! A lot has happened during our week’s break from the Friday Five so let’s catch-up and look ahead to the end of 2023.

Before jumping into the market updates and outlook, I wanted to pay tribute to Charlie Munger. This legendary man and investor passed away this week, just shy of his 100th birthday. Thanks to dear friends, I had the chance to attend the Berkshire Hathaway meeting in 2018 and enjoyed looking back this week at my blog post on that visit and key learnings, as well as reading a recent post I wrote on a Munger interview. He was a great man and a wonderful teacher. I will miss him.

Now back to the markets…November has been an excellent month for most investors – with moves many may have missed due to the holiday hub-bub! A combination of factors (including softer inflation, stronger growth, solid quarterly earnings) led to interest rates falling sharply and equity prices rising, resulting in supportive returns for both fixed income and equities during the month.

This past week, there were a few encouraging economic data points.

*GDP revision – The US economy continues to power forward. Q3 2023 GDP was revised up to a staggering 5.2% this week.

*Core PCE – Another inflation print published this week. Core PCE, the Federal Reserves preferred metric of inflation, came in right in line with expectations, rising 0.16% versus expectations of 0.20%. More notably, the 6-month annualized core inflation rate fell to 2.5% – which is not that far from the Fed’s 2% target.

*Jobless claims – Jobless claims rose this week to 218,000 – bringing the total jobless claims to 1.927 million – the highest level since November 2021. This trend in unemployment shows signs that the labor market is cooling off (which is again supportive of lower inflation moving forward)

*Consumer spending – According to Adobe, Black Friday online spending reached $9.8 billion, a 7.5% increase from last year. Consumer remains in good shape based on these initial reads

It wasn’t all good news for investors this week however. A far “hotter” than expected Chicago PMI, which is a read on manufacturing input costs, indicates that inflation may not be fully “off the table.” Oil prices also rose after the latest OPEC meeting late in the week, another potential inflationary move.

With 31 short days remaining in the year, we can’t help but look back on the year so far – as well as look forward to the last month and plan accordingly.

As for where we’ve been, I’d sum up the investing year (so far) with a simple phrase – “far better than expected.” At the start of the year, many were convinced the economy would fall into a recession, inflation would be here forever, interest rates would march higher, and earnings would fall off a cliff. With that backdrop, a 5% return on cash and short term treasuries was widely viewed as a top investment and many market participants were encouraging de-risking portfolios. We were not supportive of that view, choosing instead to stay invested in the market and balanced portfolios (including equities, as well as cash and bonds) and entrenched in the understanding that trend lines (such as inflation and interest rates) always move in both directions.

Fast forward eleven months and we are grateful to be rewarded for those convictions as US equity markets are up nearly 20% as of this post and markets have clearly picked up on the goldilocks economic backdrop of low unemployment, falling inflation, solid GDP — and the likelihood of lower interest rates in 2024 – even if the broader public and media narrative remains far more pessimistic.

Will December continue this “better than expected” narrative? As always, anything can happen and one month does not an investing lifetime make. As has been the case for all of 2023, we are thinking that markets will “zig and zag” but ultimately do well heading into the end of the year – and as a result are staying invested in line with target asset allocations as we have throughout the year. We believe this will be achieved by a combination quantitative impacts and qualitative impacts.

On the quantitative side, there are several economic data points that will move rates and markets, including November jobs report and inflation reports, as well as another Federal Reserve rate announcement – all due out mid December. While we never know how these prints will come out, based on the latest data and indications, we expect inflation to continue to slow and the Fed to hold steady heading into 2024, both of which would be supportive to markets.

On the qualitative side, we are interested in seeing what impact investor psychology has on markets in the final days of 2023. As of November 2023, there has been $240 billion of outflows from equity investments (with a $1.1 trillion increase in cash) year to date. While cash has indeed earned a positive real return (~2%) on the year, equity markets are up ~20%. At some point, the “fear of missing out” dynamic may impact investor psychology and the resulting fund flows. We’re already seeing this play our somewhat as many equity analysts have rushed to raise their year-end and 2024 S&P 500 price targets. Never underestimate the power of FOMO!

As always, we remain optimistic of investing opportunities across asset classes and remain convinced that the only way to compound wealth successfully over time is to stay the course.

Onward we go,

Note: All commentary above is as of the date of this post and is for education and informational purposes only. The views expressed are ours alone and do not represent formal investment advice. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio