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4Q 2023 Client Letter

Updated: Jan 11

One of the great parlor games of Wall Street pundits is to forecast the value of the indices for the upcoming year. 2022 was another example of the merit of these opinions. The S&P 500 ended 2022 at 3,839 after a negative total return of -18.19% during the year. The yield curve was inverted, and the economic environment looked uncertain.  As always, the narrative followed prices.  Below is a list of forecasts for the S&P 500 at the end of 2023, compiled at the end of 2022.


Strategist/Chief Economist

2023 target


Tom Lee


Deutsche Bank

Binky Chadha



John Stoltzfus



Brian Belski


Stifel Nicolaus

Barry Bannister



Sean Darby



Dubravko Lakos-Bujas


Wells Fargo

Chris Harvey


Evercore ISI

Julian Emanuel


Cantor Fitzgerald

Eric Johnston


RBC Capital

Lori Calvasina


Mizuho VSA

Steven Ricchiuto


Credit Suisse

Jonathan Golub



Savita Subramanian



Scott Chronert


Goldman Sachs

David Kostin



Max Kettner


Morgan Stanley

Mike Wilson



Hugo Ste-Marie



Keith Parker



Venu Krishna


Societe Generale

Manish Kabra


BNP Paribas

Greg Boutle


Source: Business Insider


The six lowest forecasters predicted a flat or down market for 2023.  The most optimistic forecast of 4,750 fell just shy of 4,769 that the S&P 500 reached on the last trading day of 2023.  The median forecast of this group was over 15% below where the market ended the year.  Incorporating these opinions into your allocation strategy would have been hazardous to your wealth. As usual, Warren Buffett has it right: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.” Now that the S&P 500 has run up 26% for 2023 and there is talk of a soft landing, you can be sure that the predictions will be wrong again, this time possibly overestimating where we end up in 2024.


Last year was one of significant swings and nuance galore.  As always, disseminating the signal from the noise was our mission.  A graphical review of the saga of 2023 – titled “S&P 500 2023 Return and Momentum - is provided as a reference after the written commentary.  The upper portion of the graph shows the S&P 500’s price movement with annotations to accompany the commentary below.  The lower portion of the graph shows the S&P 500’s manic nature, swinging between overbought (Relative Strength Index >70) and oversold (Relative Strength Index <30) conditions. Relative Strength Index is a technical indication of short-term price momentum.


Early market enthusiasm (annotated with a “1” in the graph) in 2023 was dashed in March (“2” in the graph) with a couple of significant bank failures.  The markets feared that persistent rate hikes by the Federal Reserve (Fed) would cause significant systemic issues in the economy. At the time, pundits talked about the unintended consequences of rate hikes and hiking until something breaks. Thankfully, these bank foreclosures proved to be contained to a few banks that pursued aggressive balance sheet tactics to stretch returns instead of bolstering liquidity. The government stepped in to offer short-term financing to provide liquidity to banks and restore confidence.  With the banking crisis in the rearview, the equity market climbed higher (“3”) into the summer months shrugging off continued increases in the Fed Funds rate and concerns about an impending recession, which was reinforced by an inverted yield curve.  The bond and equity markets disregarded the Fed’s hawkish commentary until August when the message was finally delivered, spurring an aggressive shift in the yield curve beyond 2-year notes.  Interest rates peaked at 5% on the 10-year US Treasury Bond during the gloomy days in August that included news of a second military conflict. Reflecting these factors, the stock market had a 3-month correction from the end of July of a little over 10% through the end of the third quarter (“4”).  Fear flipped to optimism as inflation data finally stagnated and employment dynamics became more balanced.  While inflation rates remained above target, the trajectory was heading in the right direction and the markets took off. Both bonds and stocks rallied with broad participation from small caps and low-quality stocks with high debt loads through the end of the year (“5”).   


Below is a summary of results for the quarter and year with a periodic table of returns in the appendix:


4Q 2023

Calendar Year 2023

Russell 3000



S&P 500



S&P 500 Equal Weight



Russell 2500



Russell 2000






iShares Core U.S. Aggregate Bond ETF



 It’s important to highlight the magnitude of the equity performance in the fourth quarter.  If you recall from the third quarter commentary after the unprecedented move in the bond market, the overarching tone was dismal.  At that time, the equal-weighted S&P 500 Index had returned just 1.79%.  Small stocks, as exemplified by the Russell 2000, had returned 2.54%.  Meanwhile, the S&P 500 was up 13.07% with clear leadership from the Magnificent 7 and technology stocks.  Many of these indexes posted double-digit returns for the year only after the fourth quarter performance. While volatility -especially in the downward trajectory- may be emotionally draining, being a contrarian and buying during these periods has been rewarded in the long-term.  We value businesses based on their long-term prospects and welcome volatility when there is a short-term dislocation between the long-term value of the business and the price in the market. 


We were fortunate to hold many of the leaders in the narrow group of stocks that led the mega-cap rally – Apple (AAPL), Google (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Meta Platforms (META) – while also holding a diversified portfolio of businesses by sector and business model. Most clients employ numerous equity strategies that are proprietary to Heron Bay Capital Management. As a rule of thumb, if your portfolio has more than 25 stocks, you are likely in a blended asset allocation model that uses multiple equity strategies. Utilizing more than one strategy can diversify risks and smooth portfolio returns. The level of diversification is dependent upon each client’s goals and circumstances.  In a year when the S&P 500 was the highest returning index, adding additional strategies diluted performance, as shows on “Asset Class Returns – Periodic Table” in the appendix.  


During this year of volatility, we employed strategies to take advantage of higher interest rates, which reached relatively attractive levels for the first time in years. We made tactical shifts throughout the year to diversify risk and position clients for the unknown and the unknowable. Our guiding principle for portfolio changes and tactical shifts is to maximize risk-adjusted returns given the opportunity set at the time.  Our clients can take comfort in the fact that we are co-invested in the same asset allocation models, so we do for clients exactly what we do for ourselves.  Aside from the ongoing portfolio management activity, some of the tactical activity included:

  • Bought a ladder of short-term Treasury securities in early 2023 to capture 4% yield and diversify equity exposure after a meaningful equity run through January.

  • Used the regional banking crisis in March as an opportunity to sell common equity positions in banks and purchase preferred stocks in the largest money center banks.  Without a clear understanding of the regulatory changes that were expected, this trade effectively harvested losses, extended fixed income duration, and captured dividend distributions of 5% to 6% while these stocks traded below their original issuance price.

  • Let the Magnificent 7 stocks in our portfolio run throughout the year.  

  • Purchased longer-dated Treasuries and municipal bonds where appropriate when the 10-year Treasury Bond was approaching 5%. 

  • Purchased closed-end mutual funds at the end of the year to diversify equity exposure with strategies that traded at deep discounts to net asset value.  Closed-end funds can experience seasonality on top of general sentiment shifts; they are subject to the same manias and euphoria that can exist for an individual stock.  Purchasing closed-end funds with high distribution rates, trading at a discount to their net asset value is a way to diversify the portfolio, and wait for a reversion of seasonality and sentiment while getting paid well to wait. Payouts were in excess of 7% at the time of purchase with double digit discounts to net asset value.  The last we saw opportunities like this was during COVID when all asset prices were depressed.      

Not everything worked in 2023 and we’ve done formal post-mortems on businesses that we’ve exited all together, such as Pfizer (PFE). One stock in our Small-to-Midcap (SMID) strategy that was particularly confounding during the year was Consensus Cloud Solutions (CCSI).  This spin-off from Ziff Davis (ZD) and J2 Global (JCOM) is a very small company with less than $500 million in market capitalization, so it is subject to illiquidity and lack of analyst coverage.  The business provides secured medical record distribution services, which generates approximately $20 million in free cash flow per quarter.  But the company has debt resulting from its spin-off, has restrictive covenants on paying that debt, and has a known seller (Ziff Davis) which was liquidating its last 5% ownership stake in the business.  We’ve continued to buy this business at compelling prices with the thought (hope) that cash flow generation and debt reduction will shine over the upcoming years. We had similar circumstances with another spin-off that is still in the portfolio, called Vontier (VNT), which had considerable tax harvesting pressure at the end of 2022 that forced the stock to under $17.  By the end of 2023, Vontier traded to $34.  


Looking ahead, we are well positioned as we enter 2024.  We have enhanced the income generation for those clients where this is a key part of their objectives, and we are fully invested in all portfolios. We like our stock portfolio of high-quality, conservatively financed, cash generating businesses with great managers at the helm. While there is much concern regarding the slowing global economy, an inverted yield curve, diplomatic tensions with China, Russia and Iran, and wars in the Ukraine and Israel; the resilience of US economy has been remarkable. We continue to monitor elements of consumer spending and credit which underpin much of the economy.  We anticipate that this year will be one of continued volatility and subject to headline “noise” due to elections, geopolitics, and other unforeseen events.  Regardless of how the narratives move the market, we will be positioned to take advantage of the opportunities they present us. 


Thank you for your continued trust in us.  We wish you and yours a healthy, happy and prosperous 2024. 



S&P 500 2023 Return and Momentum

Source: FactSet

Asset Class Returns – Periodic Table







Heron Bay Capital Management, LLC (“HBCM”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where HBCM and its representatives are properly licensed or exempt from licensure.


All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.


The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.


The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.


Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.  Return data sourced from FactSet and Orion. 


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