The Takeaway
Higher interest rates aren't necessarily bad for growth stocks.
Economic growth and recovery don't always boost small caps.
Bonds sometimes diversify equity risk and sometimes don't—and fixed income isn't a monolith.
In Star Wars: The Empire Strikes Back, Yoda told Luke Skywalker, "You must unlearn what you have learned." Investors would do well to heed the Jedi master's invocation to abandon preconceived notions. As 2023 draws to a close, we reflect on a year filled with unforeseen events and common assumptions overturned. To be fair, that describes most years.
When 2023 began, economists were debating whether the United States would experience a hard or soft landing with inflation raging and the yield curve inverted. Yet, by the third quarter of the year, gross domestic product was expanding by 5%. On the flip side, China's much anticipated postpandemic economic recovery didn't materialize, giving way to concerns over "Xi's failing model." The Israel-Hamas War was as unexpected as Russia's invasion of Ukraine in 2022.
Investment markets were also full of surprises in 2023. Equities rebounded impressively from a miserable 2022, and Japan came to life. Tech-related growth stocks resumed market leadership. Meanwhile, investors lured into fixed income by high yields and the promise of falling rates were met with borrowing costs that promised to stay "higher for longer."
Investors should be skeptical of conventional wisdom. Uncertainty surrounds the forces that move markets, how assets interact, and which investments best suit the macro environment. Rules of thumb about investing are hardly the immutable laws of physics.
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