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From downturn to upswing: Strong fourth-quarter returns in stocks and bonds

The final two months of 2023 witnessed impressive surges in both the equity and bond markets, with increases of approximately 15% and 8% respectively.These gains contributed to year-to-date returns of 25% and 5% for the equity and bond markets, respectively. It is worth noting that these returns followed significant selloffs in both markets over the prior few months. This pattern of fluctuating markets is a common occurrence that investors often experience throughout their investing journey.

The unpredictable nature of the markets, characterized by clusters of upward and downward swings, intersects with investors' rational behaviors such as loss aversion, regret, and the fear of missing out (FOMO). Emotions like regret and loss aversion often influence timing decisions, leading investors to sell out when losses occur, which may seem intuitive and appealing. However, it is important to recognize that these decisions can be detrimental, as strong bull market recoveries often follow, leading to subsequent regret and FOMO.

Don’t overlook the role of emotional and behavioral fortitude

As we have learned repeatedly, emotional and behavioral fortitude can be just as crucial, if not more so, than the specific portfolio in which clients invest. Previous analysis and blogs have demonstrated the risks associated with attempting to time the equity and fixed income markets in order to avoid downturns and capture the best days, months, and quarters. This is challenging due to the tendency for both positive and negative market movements to cluster together, a phenomenon also observed in the fixed income market.

It is worth highlighting that the equity market has now fully recovered on a total return basis from the declines experienced in 2022, reaching all-time highs. Additionally, the 8% return in the bond markets over the past eight weeks ranks among some of the strongest bond market performances for comparable time frames.

The journey to reaching new all-time highs in the equity market has been far from smooth and unexpected by most. It has been characterized by strong oscillating moves, which, although normal, have not followed a linear trajectory. The figure below illustrates the monthly returns of stocks and bonds, showcasing their non-linear and oscillating nature. Despite the ups and downs, when compounded together, these returns have resulted in robust year-to-date performance.



Figure 1: Rollercoaster of a year ending with an incredible rally during the 4th quarter

a)   Cumulative 2023 return for stocks by month



b)    Cumulative 2023 return for bonds by month


Notes: Figures 1a and 1b show the cumulative performance, by month, from January 1st through December 21, 2023.

Sources: Investment Advisory Research Center analysis using data from Morningstar, Inc. Figure 1a, stocks: CRSP US Total Market Index.  Figure 1b, bonds: Bloomberg U.S. Aggregate Bond Index.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.



Equity concentration: Not a new phenomenon

Where did these impressive returns come from? It is worth noting that there is abundant news coverage highlighting the role of only a handful of stocks in driving the quarterly and yearly rally in the stock markets. These stocks called the “Magnificent 8” include Amazon, Apple, Microsoft, Nvidia, Alphabet (Google), Meta (Facebook), Netflix and Tesla. For the quarter and year, the Magnificent 8 returns were 14% and 77% respectively, while the S&P 500 returns excluding the Magnificent 8 for the quarter and year were 9% and 10% respectively.2 Importantly, this phenomenon is not new. In fact, as we can see below a historical analysis reveals that a significant portion of the market's returns can be attributed to a small percentage of the thousands of stocks that have existed. Even when we exclude the recent mega-cap tech growth boom over the last ten years, we find that a small percentage of stocks still explains much of the market’s historical returns.

For instance, as illustrated in the chart below, it becomes evident that throughout history, only a mere 72 companies out of the thousands of publicly traded companies have accounted for half of the total returns. This highlights the concentrated nature of market performance, where a select few companies play a significant role in driving overall returns.


Figure 2: Equity concentration isn’t new—a  small percentage of U.S. stocks have produced much of the markets’ historical returns

Number of firms that explain fractions of market returns



Notes: Calculations based on total asset-weighted returns of individual U.S. publicly traded stocks as a percentage of total U.S. asset-weighted returns from all publicly traded U.S. stocks.

Sources: Investment Advisory Research Center analysis using data from Shareholder Wealth Enhancement, Bessembinder (2023)

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.


As an investor, one way to ensure that you don't miss out on the potential gains from these top-performing stocks is by owning the entire market. As an advisor, it is crucial to consider the implications of underweighting these stocks as it can result in significant tracking error compared to your clients' benchmark. This tracking error not only puts your clients' investment goals at risk but also poses a potential threat to your practice. It is important to remember that strategic asset allocations are constructed based on long-term considerations of risk, return, and relationships across asset classes which necessitate owning the entire market without selectively underweight specific stocks.

The longer and wider the tracking error persists, the higher the likelihood that your clients may not achieve their desired investment outcomes. Additionally, it increases the risk of clients terminating their relationship with your practice. The chart below clearly demonstrates the significant impact that even a small underweight to the top-performing stocks, referred to as the “Magnificent 8,” would have on investors' returns. For instance, if an advisor had chosen to underweight these 8 firms, which currently represent approximately 30% of the S&P 500, by 10% it would have resulted in their total weighting of 27%. Consequently, a mere 3% absolute underweight to the “Magnificent 8” would have caused their clients to underperform the S&P 500 by 5.2% over the past 10 years and 1.1% in 2023 alone.

It is worth noting that during this period, many in the financial media were suggesting that these stocks were highly overvalued, leading to relative underweight positions that ultimately proved detrimental to both clients and practice outcomes.


Figure 3: Difference in cumulative returns if underweight the “Magnificent 8” stocks relative to the S&P 500


Notes: The above figure shows the difference in cumulative returns relative to the S&P 500 Index given 50%, 25%, and 10% underweights to the Magnificent 8 stocks from January 1, 2014, through December 21, 2023.

Sources: Investment Advisory Research Center analysis using data from FactSet, Inc.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

If the goal is to diversify equity market concentration, one effective approach is to ensure that the portfolio is properly diversified globally. This means representing portfolio exposures in a holistic manner utilizing a total return approach.



The power of “staying the course”

In 2022, we introduced a series of “we are here” illustrations to highlight the historically poor quarterly returns of both stocks and bonds during that period. However, in the five quarters since those challenging times, these same illustrations now demonstrate the power of "staying the course.” They showcase how the markets have rebounded strongly, emphasizing the importance of maintaining a long-term investment strategy and not succumbing to short-term market fluctuations.


Figure 4a: Distribution of annual stock performance (1928–2023)

Figure 4b: Distribution of annual bond performance (1928—2023)


Figure 4c: Distribution of annual 60/40 performance (1928—2023)


Notes: Figures 4a, 4b, and 4c show the cumulative performance from January through December each calendar year going back to 1928. Data for 2023 performance is through December 21, 2023.

Sources: Investment Advisory Research Center analysis using data from Morningstar, Inc. Figures 4a to c.: Stocks: S&P 90 Index from 1928 through March 3,1957; S&P 500 Index from March 4, 1957 through 1970; Wilshire 5000 from 1971 through April 22, 2005; MSCI US Broad Market Index through June 2, 2013; CRSP US Total Market Index thereafter. Bonds: IA SBBI U.S. Intermediate-Term Government Bond Index through 1972; Bloomberg U.S. Government/Credit Intermediate-Term Index from 1973 through 1975; Bloomberg U.S. Aggregate Bond Index thereafter. 60/40: Simulated portfolio with 60% allocated to stocks and 40% allocated to bonds.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.



Despite the market's performance swings over the past decade, allocations to stocks, bonds and money markets have shown remarkable stability, even more so than what we have historically observed. This trend supports our hypothesis that advisors have wholeheartedly embraced the “Stay the course” message. It is evident that they have undergone a radical transformation, as outlined in our Advisors Alpha work3 and are swiftly adopting a value proposition that holds a high probability of success for both their clients and their practice.

This value proposition is centered around wealth management and behavioral coaching, recognizing the importance of managing not only financial aspects but also the behavioral biases that can impact investment decisions. By resisting short-term market fluctuations and disregarding the opinions of media pundits, we see advisors adhering to the 3B model, emphasizing long-term success and stability.


2024 and beyond

The past year has served as a stark reminder that markets are inherently non-linear and unpredictable. This unpredictability highlights the importance of providing additional behavioral coaching to your clients, as it can add significant value to their investment experience. As we enter 2024 and you prepare for your annual reviews with your clients, it presents an excellent opportunity to reinforce the principle of “staying the course” and engage in “remember when” conversations.

For instance, you can remind your clients of the conversation you had at the end of September, when they were contemplating exiting the equity market or shifting their fixed income to cash. By reflecting on this decision, you can demonstrate the potential consequences of such actions. Had they followed through, their portfolio value would now be $y instead of $x. These conversations not only emphasize the tangible value you provide but also deepen your relationships with your clients.

We are committed to helping you quantify and articulate the value you bring to your clients. Please feel free to explore our Behavioral Coaching Toolkit, Advisor's Alpha hub, or reach out to our sales teams for further assistance.


1Through December 21, 2023.

2FactSet data, through December 21, 2023.

3Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, David J. Walker, and Maria C. Quinn, 2022. Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. Valley Forge, Pa.: The Vanguard Group.







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Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is not a guarantee of future results.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.




Publication date: February 2024

For Advisor use only. Not for public distribution.

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