Despite a slow start to Q4, low treasury bond issuance, a dovish Fed, and cooling inflation led to double digit returns for equities and one of the best quarters in decades for bonds. Leading into November, small caps were down -4.5% YTD but the recent rally and surge of regional banks led to double digit returns in December alone. The yield on the 10-year Treasury note concluded the year nearly where it started at 3.9%, and down from its October peak of 5%; this end of year rally staved off what could have been a record 3rd consecutive down year for bonds. Lastly, lower energy prices caused broad commodities to move lower in Q4 and were one of the few asset classes in negative territory in 2023. Cuts in oil production, geopolitics, and shifts in monetary policy could cause commodity prices to be quite volatile in 2024.

In Pathstone’s December 2022 CIO Letter, we forecasted a “bumpy road back to normal.” We believed that despite the severity of the moves seen in 2022, the market and economy were on the road back to a scenario where more persistent returns would emerge.  Nearly a year later, we have certainly seen some bumps (three major bank failures, debt ceiling crises, continued geopolitical tensions), but we also see signs for smoother roads ahead: The Fed has signaled the end of its rate-hiking cycle, the economy has strengthened while inflation has cooled, and equity markets have rebounded. Investors may now be asking, “Are we there yet?”

To address that question, we need to understand what “there” means.

In this edition of our annual year-end letter, Pathstone’s Chief Investment Office examines the state of the markets and economy and offers insights on where we are on our journey and what our destination might be in 2024. Our leaders will address the macro outlook, what a long-term “normal” environment might look like, emerging secular trends poised to break free of the economic cycle, as well current trends and actionable investment ideas across listed and private markets.

In this letter:

• Economic Outlook: Reasons for Optimism
• What Is Normal?
• Investment Themes That Transcend the Cycle
• Listed Markets: Fundamentals Are Back
• Private Markets: Manager and Asset Selection Key
• Closing Remarks: Creating a New Normal at Pathstone

With the current makeup of Congress, we feel confident we will not see another major catalyst for tax policy change until the 2024 general elections. Accordingly, this year-end planning note focuses on current law and provides a framework of considerations and opportunities to explore as part of traditional year-end planning. It is also not too early to start planning for the sunsetting of several provisions of the 2017 Tax Cuts and Jobs Act (TCJA) in 2026.

In our Highlights section below we summarize the key points. To see a fuller explanation for those who want to dive into the details, click download PDF.

As always, please engage your Pathstone advisory team to help assess opportunities and their potential application and appropriateness to your family’s unique planning situation.