Quarterly Newsletter A great Quarter Finishes a Sound Year for Markets Join our Quarterly Newsletter January 2024 Junius V. Beaver, IIICIO, PrincipalFinancial markets finished in a similar fashion to how they started the year — in rally mode. After a challenging 2022 (S&P 500 down 19% and the Nasdaq down 33%) and broad expectations of a recession occurring at some point in 2023, equity and fixed income markets finished the year with solid returns. The S&P 500 gained 24% and the Nasdaq rose 43%. These results were a welcome surprise. At year’s end, the markets remained just below the record highs set at the end of 2021.Leading up to the fourth quarter much of the equity market return was concentrated in Large Cap Growth Stocks, led primarily by the largest seven technology companies now known as the “Magnificent 7.” In the fourth quarter, those gains broadened out and almost all assets appreciated considerably. 2023 RevisitedWhile markets finished with positive momentum and broadly exceeded return expectations, there was significant volatility throughout the year. After raising rates by over 4% in 2022 to quell high inflation, the Federal Reserve continued raising rates to almost 5.5% in 2023. While the Magnificent 7 technology stocks rebounded from their selloff in 2022, high interest rates, a debt ceiling showdown and continued geopolitical tension kept recession concerns elevated, and weighed on most other equity returns for much of the year.Despite headwinds and volatility, the overall economy performed quite well. GDP expanded almost 3%. Inflation – which started the year at 6.4% – continued to come down faster than expected and finished the year at 3.4%. Unemployment remained low, ending the year with a rate of 3.7%. Both wage gains and the number of job openings did decrease, indicating a more balanced labor market.These factors led to the Federal Reserve to signal that they were most likely done raising interest rates for now. This helped change most economists’ view from one of expecting a recession in the near term to one of a soft landing and continued economic growth in 2024. In 2024, Cash May Not Be KingLooking back, 2023 may be viewed as the year where risk-free returns came back into existence. One of the benefits of higher interest rates was the ability to earn 5% or more investing in “risk-free” Treasury bills and notes. The benefit of buying these instruments is there are no transaction costs, and if held to maturity, your return is known and guaranteed by the full faith and credit of the U.S. Treasury. Certificate of Deposit (CDs) and Money Market rates also increased throughout the year. This allowed investors to earn respectable interest rates on their “cash” for the first time in recent memory.One of the biggest risks to holding these instruments is known as “reinvestment risk.” Reinvestment risk is the possibility that you will have to reinvest the proceeds from a matured Treasury bill, note, or CD at a rate lower than your current rate. While the Federal Reserve was raising interest rates in 2023, reinvestment risk was less of a concern. Going forward, rates are largely expected to decrease throughout the year, with the Federal Reserve projecting three rate cuts by the end of 2024. As a result, now may be a good time to evaluate short-term Treasuries and other cash-like holdings for reinvestment elsewhere and the potential of better long-term returns. Return to NormalWhile 2023 was a year of transition from rising inflation to falling inflation and rising interest rates to falling interest rates, 2024 may be the first year since the pandemic that could be characterized as a “return to normal.” What is normal now? We think it means several things:First, normal means inflation continues trending toward the Federal Reserve’s long-term target of 2%.Second, the Federal Reserve gradually reduces interest rates toward their longer-term projection of 2.50%. This is well above the 0% rates seen during the pandemic and Great Financial Crisis, but well below where the rates are today.Third, while GDP growth is expected to slow in 2024, the expectation is that a recession will be avoided, and GDP growth will be more in line with longer term average growth rates.Finally, 2023 market returns were concentrated in the largest 7 stocks in the S&P 500. A return to normal would see this performance broaden out, potentially rewarding more diversified portfolios.Normal might also mean continued volatility and unexpected events throughout the year. According to a study by Capital Group, investors should expect market declines of over 5% about three times per year and a decline of 10% about once each year. We agree with the findings of that study. A Presidential election in the U.S. and geopolitical tensions around the world could be catalysts for some of these potential market events. However, as 2023 illustrated, financial markets have rewarded patient and disciplined investors who have a long-term plan in place.We look forward to continuing to help you achieve your long-term financial goals in 2024, and beyond. Stay well and if you have any questions or concerns, please don’t hesitate to reach out.Junius V. (Trip) Beaver III, is a co-founder of Lanier Asset Management and serves as its Chief Investment Officer. Trip has been a financial advisor delivering high-value investment solutions to affluent individuals since 1994. In addition to his work at Lanier, Trip donates his time and investment expertise to charitable organizations such as the Library Foundation and the Metro United Way.