2024 Newsletter - Reflecting on the Evolving World of Equity Markets

A new year is here, and with it, an opportunity to send you my January letter, as has now become our tradition. I hope this letter finds you and your family well. As you know, this communication serves as a recap of what is behind us, a commentary on what is before us, and a reminder of the time-tested principles upon which we operate.

In the early 2000s, Greg Glassman pondered a groundbreaking approach to physical fitness: preparing for any physical contingency, not just the known and unknown, but the unknowable. This methodology, emphasizing "constantly varied, high-intensity, functional movement," seeks to enhance an individual’s capacity, both physically and mentally, to perform across unpredictable scenarios. It’s an empirical, evidence-based fitness paradigm that encourages adaptability, resilience, and continuous improvement.

“We sought to build a program that would prepare trainees for any physical contingency—not only for the unknown but for the unknowable as well.” - Greg Glassman, CrossFit Founder

Well, the rest is history. CrossFit went on to becoming one of the fastest growing brands in the world.

As a dedicated CrossFitter and Financial Advisor, I can’t help but draw strong comparisons between Glassman's revolutionary approach to fitness, and our investment philosophy at Beck Bode. Specifically, our relentless focus on managing - not the unpredictability of the markets, but our own ACTIONS and EMOTIONS in response to a stimulus.

Recent Behavior of the Equity Markets

In 2022:

• The Dow experienced a peak-to-trough decline of 21%.
• The S&P 500 declined by 25%.
• The Nasdaq 100 saw a 35% decline.

By Christmas week of 2023, all indices had reached new heights on a total return basis.

Why stocks did this is irrelevant to what we can learn from this experience. Let’s face it: there are almost as many theories and explanations of why as there are market commentators, of whom I am happily not one. (I would point out, however, that the number of said commentators who successfully forecast both the market action of 2022 and that of 2023 is, to my knowledge, plus or minus zero.)

What should matter most to us long-term, goal-focused, plan-driven equity investors is not why this happened but that it happened. Specifically, that there could be a pervasive and very significant bear market over most of one year, and that those declines could be entirely erased in the following year. Although not nearly as quick or as perfectly symmetrical as the 2022-23 experience, in the largest sense that's how it works.

Which leads me to a restatement of our investment principles, followed by a reflection on current economic and market conditions.

Our Enduring Principles

• The economy cannot be consistently forecast, nor the market consistently timed. Thus, we believe that the highest-probability method of capturing equities' long-term return is simply to remain invested all the time.
  
  
• We are long-term owners of businesses, as opposed to speculators on the near-term trend of stock prices.
  
  
• Declines in the mainstream equity market, though frequent and sometimes quite significant, have always been overcome, as America's most consistently successful companies ceaselessly innovate.
  
  
• Long-term investment success most reliably depends on devising a plan and acting continuously on that plan.
  
  
• An investment policy based on anticipating (or reacting to) current economic, financial or political events/trends most often fails in the long run.

Current Commentary

The long-term impacts of the COVID pandemic on the economy, markets, and society are still unfolding in ways that cannot be predicted, much less translated into rational investment policy.

Noteworthy financial events include:

1. The central financial event in response to COVID was a 40% explosion in the M2 money supply by the Federal Reserve. It predictably ignited a firestorm of inflation.
   
   
2. To stamp out that inflation, the Fed then implemented the sharpest, fastest interest rate spike in its 110-year history. Both debt and equity markets cratered in response.
   
   
3. Despite this, economic activity just about everywhere except for the housing sector has remained relatively robust; employment activity has, at least so far, been largely unaffected.
   
   
4. Inflation has come down significantly, though not yet close to the Fed's 2% target. But prices for most goods and nearly all services remain elevated, straining middle-class budgets.
   
   
5. Capital markets have recovered significantly, as speculation now centers on when and how much the Fed may lower interest rates in 2024, and whether a recession may yet begin, whatever they do. These outcomes are unknowable—probably even to the Fed itself—and don't lend themselves to forming a rational long-term investment policy.

Significant uncertainties abound. Trends in the U.S. federal deficit and the national debt continue to appear unsustainable. Social Security and Medicare appear to be on paths to eventual insolvency unless reformed. The serial debt ceiling crisis continues, and a bitterly partisan presidential election looms. The markets will face significant challenges in the year just beginning, as indeed they do every year.

Remaining Resilient

Just as CrossFit teaches us to remain adaptable and resilient in the face of the unknown, our investment philosophy at Beck Bode emphasizes steadfastness amidst market uncertainties. We look forward to navigating these uncharted waters with you and staying true to our principles for long-term success. My advice remains consistent with our past communications. Let us review your long-term financial goals and, if they remain unchanged, continue with our established plan. Unless our objectives shift, there's likely no need for significant portfolio adjustments.

I welcome your questions and look forward to our continued conversations. Thank you once more for entrusting us with the privilege of serving you and your family.

Warm regards,

Ben Beck, CFP®

Chief Investment Officer & Managing Partner