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As I write, major U.S. stock indices are again posting new highs. Thankfully, earnings in today’s hottest sectors are real, suggesting little of the purely speculative fever of 1980s Japan (or the 1990s dot-com bubble, for that matter). Still, this moment of seemingly invincible enthusiasm for equities is a good time to remember that prices can fall fast, hard, and without warning. In fact, it is the “unknown unknowns” of, say, a global pandemic that tend to prompt the sharpest declines. Better-recognized fears—these days, of recession or a rate change coming at the “wrong” time or in the “wrong” direction—warrant attention, but often end up as mere bricks in the “wall of worry” that investors must invariably climb.

2023 may one day be seen as having quietly marked the end of an investing era—and with some relief. Already, few market participants yearn for the financial meltdowns, monetary blowouts, unchecked (and unfunded) fiscal stimulus, and far-reaching pandemic fallout that defined the past fifteen years. It is good to see positive interest rates and discussion of organic economic forces return to the fore, and evidence of renewed investor discipline now that money once again carries a cost. Nevertheless, history has neither stopped, nor restored some mythic, pre-2008 simplicity. Sovereign debt levels stand at staggering records, and political, demographic and technological change guarantee that past performance will not guide us to the future. Perhaps most of all, the mechanics of responsible asset allocation are, if anything, even more important now that equities must compete with bonds for investor attention. Indeed, recent data suggests a range of plausible scenarios to consider for both asset classes as we look toward 2024.

As we close out the third quarter, we find markets still struggling to digest the economic and financial cross-currents triggered by global inflation and the efforts of central banks to combat it. Growth continues to trend downward almost everywhere, prompting European equities to soften and China-dominated emerging markets indexes to decline more steeply. In the U.S., too, stocks gave back some of the year’s gains as the Federal Reserve’s record-setting rate-hike campaign helped to cut both inflation and growth roughly in half. Yet U.S. markets are faring better than most others on a year-to-date basis, supported by remarkable resilience in consumption and employment. In cap-weighted indexes, a handful of high-fliers have even kept returns solidly positive—the S&P 500 remains up 13.3% so far this year—despite more modest gains in average earnings.

As we approach the heart of summer, economic and geopolitical waves seem to be breaking almost nonstop, creating confusing crosscurrents for investors struggling to get their bearings on inflation, growth and market prospects. For its part, the U.S. Federal Reserve last week decided—reasonably enough—to take stock, holding the fed funds rate at 5.25% after hiking from near zero in a record- breaking 15 months. Yet the churn of news continues. In the U.S., economic tea leaves are scrutinized in an effort to reconcile resilient stock and labor markets, disparate pricing data for various goods and services, and the future path of monetary policy. Across the pond, the Eurozone appears to have entered at least a mild recession amid stubborn inflation and wobbly business confidence, all complicated by the protracted war in Ukraine. Further east, Beijing has finally restarted China’s economic engine after sunsetting the world’s most restrictive Covid policy, yet both domestic and export-related data suggest the recovery there remains underwhelming at best.

Just three months ago, the Clear Harbor team was preparing investment strategies in anticipation of a year of declining profit margins, ebbing inflationary pressures, and a monetary pause or even pivot. While much of this is indeed evolving as expected, it is once again an “unknown unknown” that has emerged as the primary story shaking up investor perceptions and driving market performance: the collapse of Silicon Valley Bank (SVB) in California and Signature Bank in New York. These failures have put hundreds of other independent and regional banks under pressure from depositors and investors, while leaving regulators and lawmakers scrambling to understand the causes and forestall a crisis. Before I delve into that subject and its implications for the markets, let me state as clearly as I can: Clear Harbor’s commitment to safeguard client assets is expressed at many levels, from our own internal controls to our custodial banking relationships with financially stable market leaders such as Pershing and Schwab. Likewise, our collective experience during the 2008-2009 financial crisis keeps the entire team mindful at all times of the structure and safety of deposits and short-term cash, money market funds, and fixed income securities (chiefly Treasury bills).

2022 provided ample reminders that markets are driven by human forces, and can be just as mercurial. Indeed, those concerned with prospects for major asset classes in the new year must continue to scrutinize the ever-evolving steps in the monetary and economic dance as central bankers, corporate leaders and ordinary consumers—humans, all—strive to find their footing amidst various uncertainties. Still, certain trends came into clearer focus over the course of the year. The pandemic and the war in Ukraine have created, highlighted or greatly accelerated changes that are structural in nature. In some cases, such as Europe’s renewed urgency on clean energy or America’s re-shoring of certain supply chains, they may prove nothing short of tectonic. With the cost of capital no longer virtually zero, such considerations carry great weight with us as we consider how consumers, businesses, and investors will behave not just in the next four quarters, but in the years that will follow.