PWM 2024 Annual Letter
The 2023 Bull Market
The 2023 Bull Market was the most hated in history as experts and investors watched with distrust as stocks soared to all-time highs despite numerous headwinds, like rising interest rates, high-profile bank failures, and wars in Ukraine and the Middle East. The Nasdaq jumped 43.42% last year, the sixth-best year in its history. The Dow Jones Industrial Average traded to all-time highs, and the S&P 500 came close.
After the 2022 stock market decline, many financial strategists had negative outlooks for 2023, from a stock market crash to a colossal recession, and investors waited patiently for these events to occur by parking more than $6 trillion in money market funds. The higher stocks climbed, the more money flowed into money market funds, waiting for the doomsayer's predictions to come true, which never happened. I would argue that the Federal Reserve engineered a soft landing, and we are now in the midst of a Goldilocks economy with low unemployment, moderate interest rates, rising wages, and a robust economy.
Investors can create generational wealth if they own stocks, invest regularly, and avoid big mistakes. What's a big mistake? It occurs when investors panic during corrections like 1987, 2000, 2008, 2018, 2020, or 2022. The October 19, 1987 crash was the worst since the Great Depression, yet the Dow Jones finished the year in positive territory. After the Tech Wreck, the S&P 500 climbed 66% from 2003 to 2007. It soared 141% after the Great Financial Crisis (GFC). The stock market crashed 31% in thirty days during the initial days of COVID-19, but from March 2020 to December 2021, it jumped 113%. If you stayed in the game, your assets recovered.
Interest rates peaked last October as the bellwether US 10-Year Treasury Note traded above 5%. Interest rates spiked because the Federal Reserve aggressively raised them from 0% to 5.5% to fight inflation. Because of the rate hikes, short-term rates for US Treasury Bills jumped substantially, and when the Fed starts to lower rates, the rates on short-term investments will fall quickly. Historically, short-term interest rates hover near the inflation rate or approximately 3%. Despite all the Fed activity last year, intermediate and long-term interest rates were unchanged.
During COVID-19, our government flooded the system with money and drove interest rates into the ground, and for several years, the yield on the US T-Bill was zero. Not normal. However, it's not the first time interest rates have hit rock bottom – from 2009 to 2015, the rate was at or near zero. During the dark days of the Depression, T-Bills paid zero interest from 1938 to 1940. The 97-year average T-Bill rate is 3.7%.
From March 2022 to July 2023, interest jumped from zero to 5.5%, the fastest and steepest increase in history. When interest rates spike, stocks, bonds, and real estate prices fall. In fact, long-term bonds crashed 26% in 2022. It was the worst correction ever as the bond market was returning to normal, but in doing so, it left a lot of damage in its wake. From the COVID low, the yield on the one-month T-Bill soared 55,100%! It's unlikely rates will climb that sharply again.
What does normal mean for you and your family? You can now enjoy better bond market returns with less volatility than we've experienced over the past several years. A stable bond environment benefits stocks and real estate as well. It's now possible to receive income of 5% or more from several bonds and bond funds.
Our simple but powerful models give us global exposure to stocks and bonds. They performed well last year; 80% of our households generated returns of 10% or more, and 99.47% of them made money.
We prefer holding a diversified portfolio of funds because we never know when, why, where, or how markets will turn. We can't time the market. It's similar to trying to predict the movement of a school of fish. It's impossible.
If necessary, we rebalance our models weekly through Schwab's iRebal system, which automatically scans our models, looking for changes. If one is detected, we rebalance the model to its original asset allocation to maintain a constant risk level.
We like stock exposure because they rise seventy-five percent of the time and always recover, as they did last year, despite corrections, rising interest rates, world wars, inflation, deflation, or politics.
Complicated investment strategies look good on paper because they promise huge profits and outsized returns, but it's probably too good to be true. Most investors would benefit from a simple strategy of owning low-cost index funds in a diversified portfolio rather than focusing on challenging investment strategies.
The inflation rate continues to decline and is approaching the 98-year average of 3% after peaking at 9% in 2022. Lower inflation benefits stocks and bonds. If inflation remains tame this year, interest rates will hold steady, if not fall.
During the 2022 market correction, we relied on our financial planning process to encourage clients to remain invested, stay the course, and not panic. It was a difficult ask, as it is in all down markets, but most clients took our advice. A financial plan is central to our client's portfolios because it gives us the confidence to advise them better about their financial future. Last March, we tested our client portfolios for a 50% market correction and a sustained 5% inflation rate to see how they would perform if conditions worsened. The exercise furthered our confidence that most accounts could survive our grim outlook, but what about the ones that could not? If a plan failed our test, we contacted the client to discuss several scenarios and make the appropriate adjustments. However, we did not expect the market to fall by 50% or inflation to remain above 5%, and they didn't.
In 2022, I sold Meta Platforms, Intel, and Nvidia to recognize losses for clients because the stocks were down 64%, 48%, and 50%, respectively. It was the right decision then; however, Nvidia was up 238%, Meta jumped 194%, and Intel soared 90% - three of the best-performing stocks in 2023. Below is a two-year chart of their performance.
Conversely, I held Pfizer and Walgreens down 43.8% and 30%, respectively. Pfizer's stock price soared from the 2020 lows to the 2021 highs as it delivered successful COVID-19 vaccinations but failed to capitalize on the windfall as other pharmaceutical companies focused on obesity drugs. On the other hand, Walgreens has been a disappointment for years. The catalyst for buying Walgreens was the potential spinoff of their Boots Alliance division, which COVID-19 disrupted.
I'm sure my 2025 annual letter will include several miscues, misses, or mistakes I made in 2024, but I hope not!
According to Blackrock, the market has averaged 11.6% during election years from 1926, and since 1928, the market has risen in 20 of the 24 election years. Since Ronald Reagan's election, the S&P 500 is up 2,670%, averaging 10.15% annually, in line with the historical returns.
According to Capital Group, there have been twenty 10-year rolling periods from 1936 to 2012 for those who've run the White House. Democrats have controlled eleven periods with an average annual return of 11.2%, and Republicans have controlled nine, with an average yearly return of 10.5%. Since 1936, the market has generated an average annual return of 10.28% under Democrats and Republicans.
I recommend remaining invested and not trying to time the market based on headlines or predictions regarding this year's election, and I hope the election goes your way whether you're red, blue, or purple.
What can go wrong this year? Plenty. Potential risks to stocks include expanded wars in Ukraine and the Middle East, China invading Taiwan, and the US election in November. If inflation returns, the Fed will continue to raise interest rates.
I appreciate your confidence in our firm, especially after 2022, when markets performed terribly. It takes faith to ride out an investment correction, but you did, and last year, your accounts rebounded markedly.
We know you have many investment and planning choices, and we are grateful to work with you and your family.
Janet is celebrating her seventh year with PWM and led our transition to Schwab, a year-long process, with much success. She has also helped many of you navigate Schwab's login process, including downloading their app. Janet is at the heart of our service model.
Spencer celebrated his second anniversary with PWM by passing the grueling Certified Financial Planners™ exam. He faithfully studied for two years and passed the exam in July – well done! Spencer spearheads our weekly podcast, A View from the Perch, which you can listen to on Spotify, Apple, and other platforms. You can also watch us on YouTube.
Our firm continues to grow, and so does our Starbucks indicator! Last year, it jumped by 13.75%. We now work with clients in seventeen states primarily because of your referrals, so thank you!
Love the Lord your God with all your heart and with all your soul and with all your mind and with all your strength. The second is this: Love your neighbor as yourself. There is no commandment greater than these. ~ Mark 12:30-31