The year began with several major bank collapses, necessitating FDIC intervention to ensure depositors for amounts well beyond the official $250,000 maximum. This action was crucial to prevent further bank runs. Subsequently, long-term interest rates soared, surpassing the highs of 2022 — a year of record setting losses for bonds. This spike in rates jeopardized the economy, real estate, and stock markets. However, towards year-end, falling inflation, a surprisingly robust economy, and expectations of reduced short-term rates led to a dramatic decrease in long-term rates and a significant stock market rally, especially in speculative sectors that suffered in 2022.
Overall, the bond market closed the year with slight gains, reversing what appeared to be another year of double-digit losses for long-term bonds. U.S. stocks experienced one of their best years, with the S&P 500 returning over 26%. Conservative strategies focusing on bonds and lower-risk stock funds underperformed, achieving less than half of the stock market's substantial gains. In December, our Conservative portfolio outperformed the robust S&P 500, while our Aggressive portfolio essentially matched it, benefitting from the bond rebound. However, the underweighting in U.S. stocks resulted in relatively modest annual returns of approximately 8% and 9.5% for our Conservative and Aggressive portfolios, respectively.
We expected near 8% mortgage rates and rapidly rising corporate and consumer borrowing costs would strain the economy and stock market. This prediction, too commonplace, did not materialize, as is often the case with too-popular predictions. The Federal Reserve may have mitigated Covid stimulus inflation without causing a larger crisis, deserving some credit for this outcome.
For 2023, our primary underperformers were investments in China, bonds, and short positions. We regret not purchasing more long-term bonds during the drop in bond prices and spike in yields, although yields did not reach our anticipated 5%+ on 10-year bonds. Many investors sought to lock in near 5% rates before expected Federal Reserve rate cuts, bringing into question if rates really have peaked. Currently, shorter-term and inflation-adjusted bonds, along with foreign bonds, present more attractive opportunities, particularly if U.S. rates continue to decline and the dollar weakens.
Our China ETF Franklin FTSE China (FLCH) was the weakest stock fund in our portfolio, down approximately 2% in December and 11.1% for the year. It was our only fund to post a yearly loss without involving short positions. Chinese stocks, being a significant component of emerging market funds, largely influenced the modest single digit returns of these indexes in 2023, despite stronger performances in other markets. China's economic challenges, including a faltering real estate market and trade tensions with the U.S., remain concerns. U.S. policies under Biden, maintaining Trump-era tariffs and focusing on domestic spending in infrastructure and environmental initiatives, complicate the trade dynamics. These protectionist measures may counteract efforts to control inflation, as China has been a key factor in keeping inflation low in the U.S. since the early 2000s.
Political risks in China, including the government's increasing control over tech companies, are also significant. These developments may make Chinese tech stocks, already discounted due to government intervention, more appealing than high-valuation U.S. tech giants, which might face similar regulatory scrutiny.
Other areas of modest performance in 2023 included value stocks and traditionally safer sectors like pharmaceuticals. Our long-term holding in Homestead Value Fund (HOVLX) yielded a 12.86% return, while VanEck Vectors Pharma. (PPH) returned a modest 6.53%. With the market's shift back to growth stocks, we are considering increasing our value stock holdings and possibly divesting from the high performing Vanguard Communication ETF (VOX). Utilities, the only other negative stock fund category besides China funds, may also see a resurgence in our portfolio. While commodities were down, natural resource funds that own stocks in these sectors were up by around 7%.
Our short positions universally declined. Notably, the small ETF LeatherBack L/S Alt. Yld. (LBAY), which had a strategy of owning value-oriented stocks while shorting overpriced growth stocks, fell 8.53% for the year, after a solid 2021 and 2022 with roughly 22% returns in each of those years when trendy growth stocks sunk hard. This result was due to the modest performance of value stocks compared to the substantial gains of speculative growth stocks in 2023.
Reflecting on 2023, it's crucial to remember the year's significant bank failures, a disaster averted by government intervention. This action protected the banking system by insuring deposits well above the FDIC limit. The relatively inexpensive bailout, funded by future bank earnings and higher insurance fees, was a necessary measure to prevent a grimmer scenario. It is unclear why it was necessary to bail out billion-dollar uninsured deposits that would have experienced some losses to stop a bank run spreading when these investors could have taken some losses and FDIC could have increased support for other banks that didn't collapse to prevent more bank runs and minimize the hit to the FDIC insurance fund. This government support also raises questions about risk-taking in the financial sector. The recent inflation and interest rate hikes may signal limits to future government intervention. We hope the emerging real estate and crypto bubbles can dissipate without requiring significant government action or the rebound train might not come in on time again.
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The year began with several major bank collapses, necessitating FDIC intervention to ensure depositors for amounts well beyond the official $250,000 maximum. This action was crucial to prevent further bank runs. Subsequently, long-term interest rates soared, surpassing the highs of 2022 — a year of record setting losses for bonds. This spike in rates jeopardized the economy, real estate, and stock markets. However, towards year-end, falling inflation, a surprisingly robust economy, and expectations of reduced short-term rates led to a dramatic decrease in long-term rates and a significant stock market rally, especially in speculative sectors that suffered in 2022.
Overall, the bond market closed the year with slight gains, reversing what appeared to be another year of double-digit losses for long-term bonds. U.S. stocks experienced one of their best years, with the S&P 500 returning over 26%. Conservative strategies focusing on bonds and lower-risk stock funds underperformed, achieving less than half of the stock market's substantial gains. In December, our Conservative portfolio outperformed the robust S&P 500, while our Aggressive portfolio essentially matched it, benefitting from the bond rebound. However, the underweighting in U.S. stocks resulted in relatively modest annual returns of approximately 8% and 9.5% for our Conservative and Aggressive portfolios, respectively.
In December our Conservative portfolio gained 5.28%, and our Aggressive portfolio gained 4.43%. Benchmark Vanguard funds for December 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 4.54%; Vanguard Total Bond Index (VBMFX), up 3.69%; Vanguard Developed Mkts Index (VTMGX), up 5.70%; Vanguard Emerging Mkts Index (VEIEX), up 3.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.
We expected near 8% mortgage rates and rapidly rising corporate and consumer borrowing costs would strain the economy and stock market. This prediction, too commonplace, did not materialize, as is often the case with too-popular predictions. The Federal Reserve may have mitigated Covid stimulus inflation without causing a larger crisis, deserving some credit for this outcome.
For 2023, our primary underperformers were investments in China, bonds, and short positions. We regret not purchasing more long-term bonds during the drop in bond prices and spike in yields, although yields did not reach our anticipated 5%+ on 10-year bonds. Many investors sought to lock in near 5% rates before expected Federal Reserve rate cuts, bringing into question if rates really have peaked. Currently, shorter-term and inflation-adjusted bonds, along with foreign bonds, present more attractive opportunities, particularly if U.S. rates continue to decline and the dollar weakens.
Our China ETF Franklin FTSE China (FLCH) was the weakest stock fund in our portfolio, down approximately 2% in December and 11.1% for the year. It was our only fund to post a yearly loss without involving short positions. Chinese stocks, being a significant component of emerging market funds, largely influenced the modest single digit returns of these indexes in 2023, despite stronger performances in other markets. China's economic challenges, including a faltering real estate market and trade tensions with the U.S., remain concerns. U.S. policies under Biden, maintaining Trump-era tariffs and focusing on domestic spending in infrastructure and environmental initiatives, complicate the trade dynamics. These protectionist measures may counteract efforts to control inflation, as China has been a key factor in keeping inflation low in the U.S. since the early 2000s.
Political risks in China, including the government's increasing control over tech companies, are also significant. These developments may make Chinese tech stocks, already discounted due to government intervention, more appealing than high-valuation U.S. tech giants, which might face similar regulatory scrutiny.
Other areas of modest performance in 2023 included value stocks and traditionally safer sectors like pharmaceuticals. Our long-term holding in Homestead Value Fund (HOVLX) yielded a 12.86% return, while VanEck Vectors Pharma. (PPH) returned a modest 6.53%. With the market's shift back to growth stocks, we are considering increasing our value stock holdings and possibly divesting from the high performing Vanguard Communication ETF (VOX). Utilities, the only other negative stock fund category besides China funds, may also see a resurgence in our portfolio. While commodities were down, natural resource funds that own stocks in these sectors were up by around 7%.
Our short positions universally declined. Notably, the small ETF LeatherBack L/S Alt. Yld. (LBAY), which had a strategy of owning value-oriented stocks while shorting overpriced growth stocks, fell 8.53% for the year, after a solid 2021 and 2022 with roughly 22% returns in each of those years when trendy growth stocks sunk hard. This result was due to the modest performance of value stocks compared to the substantial gains of speculative growth stocks in 2023.
Reflecting on 2023, it's crucial to remember the year's significant bank failures, a disaster averted by government intervention. This action protected the banking system by insuring deposits well above the FDIC limit. The relatively inexpensive bailout, funded by future bank earnings and higher insurance fees, was a necessary measure to prevent a grimmer scenario. It is unclear why it was necessary to bail out billion-dollar uninsured deposits that would have experienced some losses to stop a bank run spreading when these investors could have taken some losses and FDIC could have increased support for other banks that didn't collapse to prevent more bank runs and minimize the hit to the FDIC insurance fund. This government support also raises questions about risk-taking in the financial sector. The recent inflation and interest rate hikes may signal limits to future government intervention. We hope the emerging real estate and crypto bubbles can dissipate without requiring significant government action or the rebound train might not come in on time again.