Five 2023 Financial Events and the Timeless Lessons They Reinforced

Coming into 2023, a lot of very smart people made a lot of very scary predictions about the economy and about the markets. Sitting on the other side of it, I'm sure glad they were wrong. It caused me to look back on the year to see what lessons we can learn from what did and did not happen in 2023. Below is my list of the biggest financial stories of 2023 and the timeless lessons they reinforced.

Event #1: Aggressive interest rate increases to combat inflation.

This was the dominant story of 2023. Nothing moved the markets more than what Fed Chair Jerome Powell said at his pressers. The Fed was late to the game and took aggressive action to tamp inflation that peaked at 9.1% in June 2022. I think everyone reading this would agree that it felt like much more than a 9% increase in our expenses.

There were three main drivers of inflation: supply chain issues caused by COVID, the war in Ukraine and a domestic labor shortage. While it’s easy to highlight just how much interest rates peaked, it’s important to remember how long we were in a zero-rate environment. We grew accustomed to being paid 0% in our checking account, and 3% mortgages became the norm. But, alas, those things are not normal.

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The lesson: Take advantage of opportunity.

If you refinanced below 3.5%, high five! This is just the most obvious one, but it illustrates an important lesson: When opportunity presents itself, we must be willing to take swift action.

If you’re sitting at a major bank with a major balance, you are missing out on major interest. Many of the most popular money market funds are paying 5% interest. That can change at a moment’s notice and investing does involve some risk, but beyond what you need in an emergency fund, you deserve to be paid to lend your money to the bank. After all, they are certainly charging more when they lend it out.

The Roth conversions, capital gains recognition and taxable estate-reduction strategies among certain clients follow the same pattern. If we know tax rates will increase for you in the future, we are taking advantage of today’s lower tax rates. Additionally, the individual side of our current tax code (the Tax Cuts and Jobs Act) is set to expire Dec. 31, 2025. If nothing changes before then, the marginal income rates would move up, and the estate exemption would be cut in half. Depending on your situation, it may make sense to make tax moves before that deadline.

Event #2: Bank failures.

In March, it felt like the sky was falling when Silicon Valley Bank and Signature Bank failed, followed by the collapse of First Republic Bank. Were we entering the recession that so many economists had promised? Was it a repeat of the 2008 Global Financial Crisis? Both were reasonable questions. The reality is that the three banks involved all had an unacceptable amount of interest-rate risk because of the industries they dealt with and the investments they made. They were the first high-profile victims of the Fed rate increases.

The lesson: Concentration creates wealth; diversification preserves it.

In 2017, my wife and I took a clipper cruise through the Greek islands. My guess is that the next-youngest passenger was a woman we had dinner with about halfway through the trip. I learned that she had retired from Apple in her 40s. I also learned that she was able to do that solely because of the AAPL stock acquired through her tenure. People are quite forthcoming with their personal finances when they learn what business I am in.

Her story was amazing and probably similar to one you’ve heard before. As someone who sits with clients most of most days, I’m here to tell you, I hear many more on the other side: “I bought (fill in the blank), it rose to (fill in the blank), and then the company filed for bankruptcy.”

Wealth is often created from a concentration in one or a few things. It could be your business, your company’s stock, a real estate portfolio. It’s likely not where you want your money while you’re living off of it in retirement. Think Eastern Air Lines and Pan American Airways in 1991, Enron and PG&E in 2001, and Lehman Brothers and Washington Mutual in 2008. You get the picture. Even the biggest and most dominant companies today may not exist tomorrow.

Diversification and indexed strategies are boring, but they work, and they significantly reduce the downside risk of concentration, but they cannot guarantee a profit or protect against a loss.

Event #3: Another debt crisis ‘avoided.’

On June 3, President Biden signed the Fiscal Responsibility Act, once again increasing the debt ceiling and ending months-long speculation that the U.S. might default on its debt. The debt crisis was “over.” It feels sort of like Ground Hog Day…

The lesson: Don’t miss the forest for the trees.

I am, by nature, an optimist. The debt situation, however, challenges that attitude. Raising the debt ceiling does not solve our debt problem; it merely allows us to keep borrowing to finance the federal budget. That budget for 2024 is estimated by the CBO to be about $6.4 trillion. We have enough income to cover only 75% of that expenditure, according to the Congressional Budget Office. Therefore, we must borrow $1.6 trillion to keep the lights on.

Now, let’s put this in a different context. Imagine your monthly expenses total $10,000. The problem is your income is only $7,500. You put the additional $2,500 on a credit card. When you approach the limit, you call your credit card issuer and ask them to increase it. Before long, it becomes a spiral you cannot escape. You see where I’m going with this … Once again, I am an optimist, but this is an issue that needs addressing.

Event #4: AI comes front and center.

The movie I, Robot came out nearly 20 years ago. Artificial intelligence is not a new story. In November 2022, OpenAI made GPT-3, aka ChatGPT, free to the public. By January 2023, it had surpassed more than 100 million users. For the first time, we got a taste of just how powerful and useful these tools could be. Even in its infancy, AI seemed to spell the end of humans doing mundane white-collar work.

What happened in the stock market? It ripped! Nvidia (NVDA) was definitely the biggest known benefactor as the leading producer of the chips necessary to run AI applications. And the tech-heavy Nasdaq Composite has gained about 40% since the end of 2022. 

The lesson: Embrace technology, and don’t fall behind.

If you said to me, “It’s the end of mundane, white-collar work,” I’d be pretty excited. You mean I don’t have to spend hours creating or pouring over data sets? You mean I don’t have to hire an intern to organize information? But if I’m that intern or anyone in the early stages of my career, I’d probably be singing a different tune.

But let’s shift our perspective. Imagine you have an assembly line of 15 steps. The entry-level folks have steps 1-5, mid-career get 6-10, and the senior folks are tasked with quality control in 11-15. Now imagine AI takes 1-5. Everyone else shifts up. So, what do the senior people do? They innovate. They think of, and produce, more impactful products and services. They solve the bigger problems. They move society forward. That is the upside here.

Innovation creates upside beyond what we thought was possible. Technological advancements in health care didn’t replace doctors, physician assistants or nurses. They led to the discovery of vaccines, antibiotics and surgical techniques that have dramatically reduced mortality rates. Cue Ozempic ;). Technological advancements in agriculture didn’t replace farmers; they allowed us to feed a growing global population.

Event #5: The one that didn’t happen: A recession.

In December 2022, 70% of economists polled by Bloomberg predicted a recession in 2023. It seemed to be the Fed’s intent: Drive up rates so dramatically that companies will be forced to make layoffs. Once unemployment rises, consumers stop spending, prices come down with demand, and we find ourselves in a recession. The problem (only with the prediction, not an actual problem): Unemployment barely moved. Our labor market flexed its muscles, and consumers kept their wallets open.

The lesson: There is almost always more good news than bad. It’s just harder to find.

On Oct. 2, the World Health Organization (WHO) recommended a vaccine that could significantly reduce the toll of malaria, which WHO estimates kills 500,000 African children a year. This is undoubtedly good news. However, if you scanned the front page of The New York Times on Oct. 2, the only malaria headline was: An Invasive Mosquito Threatens Catastrophe in Africa.

There is war in the Middle East and Europe. It seems there is a new, devastating weather event every two weeks. Even with inflation largely tamed, things are still more expensive than they were before the pandemic. Deaths due to drug overdoses have skyrocketed. And yet, unemployment remains near 50-year lows. And, as of December, S&P 500 earnings have grown year-over-year by almost 9%. Our clients are largely reliant on the performance of U.S. companies. The longer you stretch out that time horizon, the safer that bet is. My opinion: Don’t bet against the U.S.

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