Why We Invest as if We Don’t Know, Part Deux

What if I told you that 2023 was not only one of the best years for stock market performance, but it was also historically one of the least volatile markets on record?

The market survived several rate hikes, bank failures, a government shutdown scare, and elevated recession expectations. Based on headlines, it wouldn’t be crazy to assume that 2023 was supposed to be a bad year for the stock market.

Yes, 2023 generally saw less volatility in the stock market compared to other recent years, particularly 2022.

Here's some evidence to support this:

CBOE Volatility Index (VIX): This is a common measure of expected volatility in the S&P 500 index. The VIX averaged around 18 in 2023, significantly lower than 2022's average of 27. In December 2023, it even hit a four-year low, indicating low investor anxiety.

While some sectors (technology, growth) performed well, others (energy, financials) lagged in the first half of 2023. However, volatility remained subdued despite this internal variation.

The Federal Reserve's shift towards potential interest rate cuts in 2024 helped ease concerns about rising rates and calmed markets.

Moderating inflation, solid consumer spending, and a strong labor market contributed to a more optimistic outlook and decreased market jitters.

There were still some noteworthy volatility spikes in 2023:

The regional banking crisis caused the VIX to jump above 30 due to fears about bank profitability.

In May, the Fed's hawkish statements about potentially longer-term rate hikes led to another volatility spike.

It was tempting to sit out 2023 given how painful 2022 was. That’s the problem with doubt and pessimism, things sometimes don’t play out the way we expect.

Experts weren't so expert: Despite widespread predictions of a recession and further market losses, the S&P 500 surprised everyone with a 26.4% gain (including dividends). This highlights the inherent difficulty of accurately predicting market movements.

Some investors learned to focus on actual market behavior and price trends rather than relying solely on economic forecasts and expert opinions. Moods tend to move up and down with the market. The market is up, we feel good. The market is down, we feel bad.

The market displayed remarkable resilience despite facing challenges like high inflation, rising interest rates, and geopolitical tensions. This emphasizes the long-term potential of equities even during turbulent times.

Obsessing over short-term movements often leads to missed opportunities.

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