The first half of 2023 is officially “in the books” as they say and we believe there’s value in reflecting on the months gone by and taking stock of what transpired. I think it’s fair to say that for the average investor, they might categorize this time period as “better than expected”.
Here are a few major points from the seat of a portfolio manager as I glanced backward….
1. 2023 Stock market performance: As of the last trading day in June which marks the first half of the year, the S&P 500 was positive 16.9% in 2023. These figures are to be applauded and most investors, if they allow their minds to drift back to how they felt last October, would be a combination of thrilled and surprised. How the performance has been achieved is the interesting part. The S&P 500 measures the 500 largest publicly traded companies in the US but worth noting is that the top seven mega-cap technology stocks accounted for 75% of the S&P500’s first half 2023 gain. In short, if an investor didn’t have exposure to Apple, Microsoft, Google, Amazon, etc. of the investing world then they may not have felt the positive market so much.
Below is a chart showing the overall performance of the S&P500 on a percentage return basis for 2023 AND the performance of a the NASDAQ index which measures Technology stocks specifically. This highlights the impact technology stocks have had on stock market performance. The NASDAQ has had it’s best first half of the year performance in 2023 OVER THE LAST 40 YEARS.
(Thomsone One chart 01/01/2023 – 06/30/2023 taken at 10:58am 7/6/23)
And for any other visual folks who like charts out there, here’s one showing the trailing P/E ratio of the S&P500 from 02/2020. What this illustrates is the price-per-earning ratio of the stock market over that time. The higher the multiple, the more price is being paid for a share of stock. When taken in the aggregate over the whole S&P 500 it can be looked at as one of many many indicators of whether the stock market is potentially overvalued or not. As can be seen below, there was a severe dip during COVID in the spring of 2020 and then it peaks about six months later. Since then we’ve found a reasonable range, and to me indicates we aren’t in some absurd time in history where stock prices have gone out of control such as the dot com bubble (1998-2000).
(Thomsone One chart 01/01/2023 – 06/30/2023 taken at 10:58am 7/6/23)
2. Regarding Inflation: The issue can be complicated but I think the below chart does a pretty good job of visually explaining. Know that the difference between Core CPI and Headline CPI is that Headline CPI includes price data for Food and Energy and Core does not. Thus, I personally find Core Inflation data weak and prefer to look at “Headline”. You can visually see that at this point today it looks like Inflation peaked around mid-2022 and has steadily decreased since. I wrote about this last September and thought that might be the case. Obviously, prices are always too high in the minds of us consumers but the data suggests they’ve come down some from their peak. This certainly has helped the stock market and bond markets bounce back from 2022.
3. Bond Markets and Interest Rates: Here’s a chart showing stock market performance and 10-year US treasury yields from February 2020 (COVID) to the end of June 2023. Interest rates as measured by the 10-year US treasury(USTBE) have gone from 1.6% to just shy of 4% today. Bonds look like bonds again and can actually now be considered as a potential place to seek investment return in diversified portfolios rather than just a placeholder to reduce risk/volatility of overall portfolios. The dichotomy between bond yields and stock market performance is fascinating, maybe not for normal people, but hey we chose this gig because we think so. We have discussions all the time about this stuff and we expect to make some meaningful portfolio decisions in 2023 as a result.
Well, enough looking backward and time again to look down the road some. My stock market drivers for the remainder of the year…
- The Labor Market: If a mild recession is to be avoided it will do so on the strength of the labor market. Employed Americans spend money and we are a consumer economy.
- Corporate Health and Profits: I think we’ve been in a historically very financially healthy corporate environment where profits have been relatively predictable and companies are mostly well capitalized.
3. Interest Rates and Fed Money Supply: Can the Fed balance the raising of interest rates without slowing the economy down too much and/or can the health of the above two things mask the Fed’s mistakes even if they fail?
Until next time.
Important Disclosures:
Investing involves risk including loss of principal.
Stock investing includes risks, including fluctuating prices and loss of principal.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All performance referenced is historical and is no guarantee of future results.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: A higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared with one with lower PE ratio.
