Monthly Market Update — September 2021

Key Points

  • Risk Matters Virtually all asset classes were up for the month, quarter, and year ending Dec. 31, 2023. Yet most are still negative on a two-year basis because of a basic principle that shapes investing: market returns are not symmetrical. It’s not very intuitive, but market drawdowns require a larger upswing to get back to even. For instance, it takes a +25% gain to make up for a -20% loss. The years 2022 and 2023 are a prime example of this dynamic.
  • Benefits of Diversification Recognizing that returns are asymmetric and that risk matters helps to understand why diversification is important for successful long-term investing. Again, 2022 and 2023 are instructive for how diversification helps avoid the extreme performance swings in various asset classes and smooths investment returns over time, helping to mitigate the asymmetric nature of returns.
  • Money Market Mania Volatility in the markets in 2022 and the most attractive short-term yields in decades in 2023 led to a flood of inflows to money market funds. Assets in money market funds hit an all-time high at the end of 2023 and dwarfed the flows to traditional bond and equity ETFs—meaning many investors didn’t participate in the strong rebound those asset classes experienced in 2023. 
  • Inverted All Year One of the biggest stories in 2023 was the Fed’s aggressive rate hiking policy and the corresponding surge in interest rates, particularly at the short end of the yield curve. This resulted in the yield curve becoming more inverted (after first inverting in late 2022) and remaining inverted all of 2023 – for the first time since data was available beginning in 1962.    
  • Quick Clips The pace of rate hikes in 2023 was one of the fastest in history, and now that the Fed surprised markets with a pivot to rate cuts, once they begin, they occur quickly, too. Rate-cutting cycles since 1990 have shown that cuts resulted in rapid succession.
  • Mission Accomplished? Much like the Fed has indicated a turning point in the fight against inflation, the European Central Bank (ECB) and the Bank of England (BoE) have also held interest rates steady and appear to be repositioning themselves for faster-than-expected declines in inflation and slowing economic growth. As a result, 2024 is likely to bring synchronized monetary policy easing by the world’s leading central banks.

Market Summary

Asset Class Total Returns

[Market Update] - Asset Class Total Returns December 2023 | The Retirement Planning Group

Source: Bloomberg, as of December 31, 2023. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

Stocks tried their hardest, but the S&P 500 Index just couldn’t achieve that elusive record high in the final month of the year. It was close, though! The benchmark U.S. equity index got up to 4,783 on December 28, a smidge from its all-time high of 4,797, but fell slightly on the final day of 2023. Still, the S&P 500 finished the year with a very respectable +24% increase in price and +26.3% if dividends are included. It sounds crazy, but 2023 is the first year since 2012 that the S&P didn’t hit an all-time high during the year. The 4,797 record high was set on January 3, 2022, after which the index spent the year falling -19%. Even the Nasdaq Composite Index, with its roughly 50% weighting in the Technology sector, and +43% jump in price for 2023, didn’t score a new record high in the year. You read that right, the Nasdaq was up +43% in 2023 and still didn’t overcome the -33% it lost in 2022. That provides us the opportunity to discuss why risk mitigation and diversification are so important for successful long-term investing, which we do in the first two Quick Takes sections below, Risk Matters and Benefits of Diversification. In addition, the somewhat unconventional trailing two-year performance period is included in the Asset Class Total Returns chart and Market Snapshot table.

The lack of new all-time highs notwithstanding, by most accounts, 2023 was a successful year, especially given the bleak expectations entering the year. The economy was remarkably resilient, overcoming a regional banking crisis in the Spring, another geopolitical crisis with the Israel-Hamas conflict, and several debt-ceiling/government-shutdown showdowns. Gross Domestic Product growth held above an annualized +2% for the first half of the year and then accelerated to +4.9% in the third quarter. Corporate profits held up reasonably well, too, with S&P 500 companies likely to see a +3% increase in earnings-per-share for 2023 and positive growth in 8 out of 11 sectors. Oh yeah, there were all those Fed rate hikes as well; who could forget about those?! Bond yields surged (largely responsible for the springtime drama in the regional banks) before settling down. Then, in mid-December, Federal Reserve Chairman Jerome Powell shocked the market by delivering the long-awaited “Fed pivot” (in which the Fed is likely done hiking rates). That helped reign in bond yields and fuel a year-end rally for stocks and bonds. The widely tracked Bloomberg U.S. Aggregate Bond Index finished December with a +3.8% return and was up +5.5% for the year. Non-U.S. bonds saw solid gains as well, with the Bloomberg Aggregate Global Bond Index ex U.S. up +4.5% in December and +5.7% for the year. International bonds were boosted not just by the decline in global bond yields but also from a decline in the U.S. dollar, which was down -2.1% for December and the year.

It’s worth some exploration beyond the inflation and Fed themes that dominated the investment landscape in 2023. Much of the year’s market rally was also fueled by a rush of enthusiasm for artificial intelligence (AI) stocks, particularly for some of the market’s largest companies. These so-called “Magnificent Seven” stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) were responsible for the vast majority of the market’s advance for the year. In fact, the S&P’s price gain would only have been about +8% in 2023, not +24%, without the blistering +107% return. So, it was an exceedingly narrow market last year. The gains broadened out some in November and December, a version of the S&P 500 Index in which the stocks are equal weighted, rather than market cap weighted, only gained +11.6% in price in 2023. As a result, 2023 was the second largest return advantage of the cap weighted S&P 500 over the equal weighted S&P 500 (at +12.6%) behind 1998’s outperformance (+16.3%). Outside of the AI beneficiaries, research by Bespoke Investment Group shows that other characteristics of the top-performing stocks in 2023 were stocks that were the worst performers in 2022, stocks with the highest valuations, the most heavily shorted stocks, and stocks with no or low dividends (in that order). Those are not typical qualities that define good, long-term companies and are unlikely to be the market leaders for a sustainable horizon.

Looking forward, a big question will be whether the economy can continue to elude a recession in 2024. Unfortunately, there’s plenty of evidence and valid arguments for both sides of that outcome. Inflation and the Fed will continue to dominate headlines, with 2024 shaping up to be the year of interest-rate cuts. Central banks around the world are poised to join the Fed in easing monetary policy as inflation continues to retreat. 2024 is also an election year with control of the House, Senate, and Presidency all up for grabs. In addition to the U.S., there are as many as 40 elections in other key countries this year, such as India and Mexico. Recently, shipping route closures in the Red Sea have reignited supply chain issues and sent shipping rates sharply higher. China, the world’s second largest economy, is in recession while leverage there is at an all-time high, and its property market is cracking. The impact of any one of these conditions, or the cross currents of several, could easily sway the U.S. recession outcome in one direction or another. That uncertainty and fragility set the stage for more volatility in the markets this year. For that reason, we’ll end this market update where we began it with an eye towards risk mitigation and portfolio diversification to best position for steadier returns.

[Market Update] - Market Snapshot December 2023 | The Retirement Planning Group

Source: Bloomberg. Data as of December 31, 2023.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes


Many investors may not be aware of a basic principle that shapes market returns: up and down market performance is not symmetrical. In other words, after a market loss, it takes a larger market gain to get back to even. This may seem unintuitive at first glance. One might think if their investment went down -20% for a year, and then went up +20% the following year, that the investment was back to its beginning value. Unfortunately, the math of investment returns is more pernicious than that. As shown in the diagram below, a $100,000 investment that falls by -20% is only worth $80,000. Fairly easy math. But if that $80,000 now increases by +20%, it only brings it back to $96,000. The investment is still $4,000 less than where it started. This is the penalty that volatility imposes on investment returns over time and why risk matters so much in investing. The larger a loss, the bigger the subsequent return has to be to make up for it. A -40% loss is not just two times worse than a -20% loss… it is 2.5 times worse. Using the same $100,000 initial investment example, a -40% loss would result in the investment dropping to $60,000. To get back to the original $100,000 amount, the investment must now increase by about +67% ($60,000 x 1.66667 = $100,000)! This is why risk mitigation and avoiding large drawdowns is so important for investors. After seeing the eye-popping returns that certain groups of stocks had in 2023, like the Nasdaq Composite’s +43% return, many investors may be thinking about throwing caution to the wind and just loading up on the Nasdaq (or Technology, the Magnificent 7, or High Beta, or Growth). But remember, just a year earlier, in 2022, the Nasdaq was down -33%. Again, returns are asymmetric and the Nasdaq’s +43% didn’t even make up for 2022’s -33% return. The two-year return covering 2022 and 2023 for the Nasdaq is -4.0% on a price basis and -2.4% on a total return basis (which reinvests dividends). Let’s go back to our hypothetical $100,000 and apply it to the Nasdaq for that two-year period. After the -33% return in 2022, our $100,000 would have fallen to $67,000. And a +43% return applied to $67,000 would only bring the investment back to $95,810. Investors actually needed a +49.3% return in 2023 to get the investment back above $100,000. Risk really does matter!

Market Returns are not Symmetrical

After a market drawdown, it takes a larger upswing to get back to even

[Market Update] - Market Returns are not Symmetrical December 2023 | The Retirement Planning Group


Sticking with the concept of risk and avoiding large losses, let’s revisit why diversification is so important. Every month, we end this publication with the Importance of Diversification message accompanied by the “asset class periodic table” or “investment quilt” to show how asset classes performed over the month. Now, let’s zoom out way beyond a month and look at the asset classes over the last ten calendar years, as well as the trailing period returns ending 12/31/2023. Of course, 2022 was one of the most difficult years in most investors’ lifetimes because virtually all asset classes had negative returns. And as painful as that was, diversification, or the act of holding a portfolio of many asset classes, still helped smooth out the returns of the extremely volatile asset classes like small cap stocks and growth stocks. Let’s compare and contrast the Large Cap Value and the Large Cap Growth asset classes, which generally follow the Russell 1000 Value Index and Russell 1000 Growth Index, respectively. In 2023, Large Cap Growth was the leading asset class listed, surging +42.6% (very similar holdings to the Nasdaq). Meanwhile, Large Cap Value returned +11.2% in 2023, a very respectable gain but far behind Large Growth. But investors sometimes have short memories after periods of big, double-digit returns. The year before, in 2022, Large Cap Value was the best performing asset class, albeit with a -7.7% return. Large Cap Growth, on the other hand, was the worst asset class listed in 2022, with a -29.3% return. Now consider the two-year period of 2022 and 2023. On a price basis, Large Value was down -1.6% and Large Growth was down -0.8%. But on a total return basis, in which dividends are included, Large Value was up +3.0% while Large Growth was up +1.1%. An investor with both of these asset classes didn’t experience as wild swings as the two individual asset classes. As shown in the table, the hypothetical portfolio of 60% equity asset classes and 40% bond asset classes (the orange box) is always near the middle of the group for any given period, thereby smoothing out the return stream and mitigating the downside extremes.

Diversification Can Help Reduce Risk and Smooth Out Returns

Calendar Year and Trailing Period Total Returns as of 12/31/2023

[Market Update] - Diversification Can Help Reduce Risk December 2023 | The Retirement Planning Group

Source: Bloomberg. Data as of Dec 31, 2023.
Note: please refer to the last section, Asset Class Performance, for the asset class legend and disclosures.


Many investors didn’t catch all the returns of 2023 and instead parked huge sums in money market funds – no doubt attracted to the 4-to-5% yields offered. U.S. money market funds assets soared to a fresh record $5.965 trillion at the end of 2023. In fact, 2023 saw the largest annual money market funds inflow ever, a whopping $1.151 trillion, reflecting a +25% annual growth rate. By comparison, equity Exchange Traded Funds (ETFs) saw flows of $388 billion, a -2.6% annual change, and bond ETFs had $207 billion in flows, an annual increase of +7.2%. The poor performance of stocks and bonds in 2022, coupled with the attention-getting 5% short-term yields, were the likely drivers of the massive disparity in flows between traditional stock and bond ETFs versus money market funds. One has to wonder how long those assets will stay in money market products if the Fed does begin cutting rates in earnest during 2024 and those short-term yields begin dropping.

Flows to Money Market Funds Surged in 2024

Total Assets in Money Market Funds ($ Trillions)

[Market Update] - Flows to Money Market Funds December 2023 | The Retirement Planning Group

Source: ICI, Bloomberg.


An inverted yield curve occurs when short-term rates are higher than long-term rates. Typically, long-term rates are higher than short-term rates, and historically, when that relationship flips, it has been a reliable recession indicator. Bespoke Investment Group points out that 2023 is the first year on record (since 1962) that the yield on the 3-month U.S. Treasury was greater than the yield on the 10-year U.S. Treasury for an entire calendar year. It first inverted in late 2022, and through 2023, it was inverted for 430 calendar days (or 285 trading days). Since 1962, 1979 was the next closest that the yield curve came to being inverted for a full year (97% of all trading days), and it was inverted for more than 60% of trading days in 1974 (64%) and 1981 (61%). But the yield curve’s recession warning has largely been dismissed as the consensus view has accepted the so-called “soft landing” scenario in which the Fed is able to slow the economy sufficiently to bring down inflation while also preventing a recession. But Bespoke notes that we are still well within the window of when it would be perfectly normal for a recession to start. Of all the times the yield curve inverted since 1962, the average number of calendar days separating the first day that the yield curve first inverted from the start of the recession was 589 (again we are at 430 days for this cycle). That range would take us out to the beginning of June. That doesn’t mean a recession has to occur or that it will follow an average cycle, but it is something we continue to monitor as a possible scenario and why we continue to favor higher quality portfolios with lower exposure to downside risk.

Recession Warning or False Alarm?

The 10-Year / 3-Month Yield Curve Has Been Inverted All Year

[Market Update] - Recession Warning or False Alarm December 2023 | The Retirement Planning Group

Note: Seasonally adjusted
Source: U.S. Census Bureau via St Louis Fed, The Wall Street Journal.


Federal Reserve Chair Jerome Powell stunned market watchers in mid-December at the Fed’s FOMC rate policy meeting by discussing the prospects for rate cuts. The long-awaited “Fed pivot” toward lowering rates suddenly became a reality. Slowing inflation led the Fed to pivot away from raising interest rates further (although they didn’t rule out additional hikes) and toward considering when to cut them. The surprise pivot ignited a rally on Wall Street, fueling stocks and bonds higher through the end of the year. Now, the big debate shifts to when the rate cuts will start and how many will be delivered. According to data compiled by research firm Macrobond, once the “pivot” begins, history shows that rate cuts tend to be brisk. In the chart below, the lines for 1995 and 2002 are the only rate cycles that “plateaued” early. By contrast, the 1990, 2001, and 2007 pivots resulted in a series of rate cuts in rapid succession. At the end of the year, futures markets were pricing in six to seven rate cuts in 2024, with near-certain odds that they would begin at the March Fed meeting. But in the first week of 2024 trading, comments by Fed officials and a surprisingly strong December jobs growth report tempered those expectations. By the end of the first week of 2024, the odds of a March rate cut fell near 60% and only five rate cuts were being priced in for 2024. That’s still ahead of what Fed officials are forecasting; they are only penciling in three rate cuts for 2024.

Once the Fed Starts Cutting, It Usually Goes Quickly

Federal Reserve Rate Cutting Cycles Since 1990

[Market Update] - Once the Fed Starts Cutting December 2023 | The Retirement Planning Group

Source: Macrobond.


It’s not just the U.S. Federal Reserve that is recognizing a turning point in the fight against inflation. Joining the Fed in keeping interest rates on hold in December, the European Central Bank (ECB) and the Bank of England (BoE) held interest rates steady. Faster-than-expected declines in inflation and signs of slowing economic growth on both sides of the Atlantic have led major central banks to reposition themselves. On Friday, January 5, Eurozone inflation again rose less than expected, keeping rate-cut prospects alive there. Much like 2023, 2024 will keep investors intensely focused on inflation data and how it impacts the positioning of the world’s major central banks.

Central Banks May Be Ready to Declare Victory Over Inflation

Core Consumer Price Indexes, 12-Month Change

[Market Update] - Central Banks May Be Ready December 2023 | The Retirement Planning Group

Note: Core inflation excludes food and energy in the U.S., plus alcohol and tobacco in the eurozone and U.K.
Source: U.S. Labor Department, U.K. Office for National Statistics, Eurostat, The Wall Street Journal. Data as of December 31, 2023.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

[Market Update] - Asset Class Performance December 2023 | The Retirement Planning Group

Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.