Market Resilience or Investors In Denial? A Mid-year Assessment for 2023!

I am not a market prognosticator for a simple reason. I am just not good at it, and the first six months of 2023 illustrate why market timing is often the impossible dream, something that every investor aspires to be successful at, but very few succeed on a consistent basis. At the start of the year, the consensus of market experts was that this would be a difficult year for markets, given the macro worries about inflation and an impending recession, and adding in the fear of the Fed raising rates to this mix made bullishness a rare commodity on Wall Street. Markets, as is their wont, live to surprise, and the first six months of 2023 has wrong-footed the experts (again). The Start of the Year Blues: Leading into 2023 As we enjoy the moment, with markets buoyant and economists assuring us that the worst is behind us, both in terms of inflation and the economy, it is worth recalling what the conventional wisdom was, coming into 2023. After a bruising year for every asset class, with the riskiest segments in each asset class being damaged the most, there were fears that inflation would not just stay high, but go higher, and that the economy would go into a tailspin. While this may seem perverse, the first step in understanding and assessing where we are in markets now is to go back and examine where things stood then. In my second data update post from the start of this year, I looked at US equities in 2022, with the S&P 500 down almost 20% during the year and the NASDAQ, overweighted in technology, feeling even more pain, down about a third, during the year. Looking across company groupings, returns on stocks in 2022 flipped the script on the market performance over much of the prior decade, with the winners from that decade (tech, young companies, growth companies) singled out for the worst punishment during the year. While stocks had a bad year (the eighth worst in the last century), the bond market had an even worse one. In my third post at the start of 2023, I looked at US treasuries, the long-touted haven of safety for investors. In 2022, they were in the eye on the storm, with the ten-year US treasury bond depreciating in price by more than 19% during the year, the worst year for US treasury returns in a century. The decline in bond prices was driven by surging interest rates, with short term treasuries rising far more than longer term treasuries, and the yield curve inverted towards the end of the year. The rise in US treasury rates spilled over into the corporate bond market, causing corporate bond yields to rise. Exacerbating the pain, corporate default spreads rose during the course of 2022: While default spreads rose across ratings classes, the rise was much more pronounced for the lowest ratings classes, part of a bigger story about risk capital that spilled across markets and asset classes. After a decade of easy access, translating into low risk premiums and default spreads, accompanied by a surge in IPOs and start-ups funded by venture capital, risk capital moved to the sidelines in 2022. In sum, investors were shell shocked at the start of 2023, and there seemed to be little reason to expect the coming year to be any different. That pessimism was not restricted to market outlooks. Inflation dominated the headlines and there was widespread consensus among economists that a recession was imminent, with the only questions being about how severe it would be and when it would start. The Market (and Economy) Surprises: The First Half of 2023 Halfway through 2023, I think it is safe to say that markets have surprised investors and economists again, this year. The combination of high inflation and a recession that was on the bingo cards of some economists at the start of 2023 did not manifest, with inflation declining sooner than most expected during the year: It is true that the drop in inflation was anticipated by some economists, but most of them also expected that decline to come from a rapidly slowing economy, i.e., a recession and to be Fed-driven. That has not happened either, as employment numbers have stayed strong, housing prices have (at least up till now) absorbed the blows from higher mortgage rates and the economy has continued to grow. It is true that economic activity has leveled off and housing prices have declined a little, relative to a year ago, but given the rise in rates in 2022, those changes are mild. If anything, the economy seems to have settled into a stable pattern, albeit at the high levels that it reached in the second half of 2021. I know that the game is not done, and the long-promised pain may still arrive in the second half of the year, but for the moment, at least, markets have found some respite. During the course of 2023, the Fed was at the center of most economic storylines hero to some and villain to many others, with every utterance from Jerome Powell and other Fed officials parsed for signals about future actions. That said, it is worth noting that there is very little of consequence in the economy or the market, in 2023, that you can attribute to Fed activity. The Fed has raised the Fed Funds rate multiple times this year, but those rate increases have clearly done nothing to slow the economy down and inflation has stabilized, not because of the Fed but in spit of it. I know that there are many who still like to believe that the Fed sets interest rates, but here is what market interest rates (in the form of US treasury rates) have done during 2023: If there is a Fed effect on interest rates, it is almost entirely on the very short end of the spectrum, and not on longer term rates; the ten-year and thirty-year treasury bond rates have declined during the year. That does not surprise me, since I have never bought into the “Fed did it” theme, and have written multiple posts about why it is inflation and economic growth that drive interest rates, not central banks. As inflation has dropped and the economy has kept its footing, the corporate bond market has benefited from default spreads declining, as fears subside: As in 2022, the change in default spreads is greatest at the lowest ratings, with the key difference being that spreads are declining in 2023, rather than increasing, though the spreads still remain significantly higher than they were at the start of 2022. Stock Markets Perk Up: The First Half of 2023 I noted that risk capital retreated from markets in 2022, with negative consequences for risky asset classes. To the extent that some of that risk capital is coming back into the markets, equity markets have benefited, with benefits skewing more towards the companies and markets that were punished the most in 2022. To understand the equity comeback in 2023, I start by looking at the increase in market capitalizations, in US $ terms, across the world in the first six months of the year, with the change in market capitalizations in 2022 to provide perspective: In US dollar terms, global equities have reclaimed $8.6 trillion in market value in the first six months in the year, but the severity of last year's decline has still left them $14.4 trillion below their values from the start of 2022. Looking across regions, US equities have performed the best in the first six months of 2023, adding almost 14% ($5.6 trillion) to market capitalizations, regaining almost half of the value lost in last year's rout. In US dollar terms, China was the worst performing region of the world, with equity values down 1.01% in the first six months on 2023, adding to the 18.7% that was lost last year. The two best performing parts of the world in 2022, Africa and India, performed moderately well in the first half of 2023. In US dollar terms, Latin America was flat in the first half of 2023, though there were a couple of Latin American markets that delivered stellar returns in local currency terms, albeit with high inflation eating away at these returns. It is currency rate changes that explains that contrast between local currency and dollar returns, and in the graph below, I look at the US dollar's performance broadly (against other currencies) as well as against emerging market currencies , between 2020 and 2023; After strengthening in 2022, the US dollar has weakened against most currencies in 2023, albeit only mildly. US Equities in 2023: Into the Weeds! The bulk of the surge in global equities in 2023 has come from US stocks, but there are many investors in US stocks who are looking at their portfolio performance this year, and wondering why they don't seem to be sharing in the upside. In this section, I will start by looking with an overall assessment of US equities (levels and equity risk premiums) before delving into the details of the winners and losers this year. Stocks and the Equity Risk Premium I start my assessment of US equities by looking at the performance of the S&P 500 and the NASDAQ during the first half of this year: As you can see, why the S&P has had a strong first half of 2023, increasing 15.91%, the NASDAQ has delivered almost twice that return, with its tech focus. One reason for the rise in stock prices, at least in the aggregate, has been a dampening of worries of out-of-control inflation or a deep recession, and this drop in fear can be seen in the equity risk premium, the price of risk in the equity market. In the figure below, I have graphed my estimates of expected returns on stocks and implied equity risk premiums through 2022 and the first six months of 2023: After a year for the record books, in 2022, when the expected return on stocks (the cost of equity) increased from 5.75% to 9.82%, the largest one-year increase in that number in history, we have had not just a more subdued year in 2023, but one where the expected return has come back down to 8.81%. In the process, the implied equity risk premium, which peaked at 5.94% on January 1, 2023, is back down to 5% at the start of July 2023. Even after that drop, equity risk premiums are still at roughly the average value since 2008, and significantly higher than the average since 1960. If the essence of a bubble is that equity risk premiums become "too low", the numbers, at least for the moment, don't seem to signaling a bubble (unlike years like 1999, when the equity risk premium dropped to 2%). Sector and Industry The divergence between the S&P 500 and the NASDAQ's performance this year provides clues as to which sectors have benefited the most this year, as risk has receded. In the table below, I break all US equities into sectors and report on performance, in 2022 and in the first half of 2023: As you can see, four of the twelve sectors have had negative returns in 2023, with energy stocks down more than 17% this year. The biggest winner, and this should come as no surprise, has been technology, with a return of 43% in 2023, and almost entirely recovering its losses in 2022. Financials, handicapped by the bank runs at SVB and First Republic, have been flat for the year, as has been real estate. Communication services and consumer discretionary have had a strong first half of 2023, but remain more than 20% below their levels at the star of 2022. Breaking sectors down into industry-level details, we can identify the biggest winners and losers, among industries. In the table below, I list the ten worst performing and best performing industry groups, based purely on market capitalization change in the first half of 2023: Download market performance in 2023, by industry The worst performing industry groups are in financial services and energy, with oilfield services companies being the worst impacted. The best performing industry group is auto & truck, but those results are skewed upwards, with one big winner (Tesla) accounting for a large portion of the increase in market capitalization in the sector. There are several technology groups that are on the winner list, not just in terms of percentage increases, but also in absolute value changes, with semiconductors, computers/peripherals and software all adding more than a trillion dollars in market capitalization apiece. Market Capitalization and Profitability The first six months of the year have also seen concentrated gains in a larger companies and this can be seen in the table below, where I break companies down based upon their market capitalizations at the start of 2023 into deciles, and then break the stocks down in each decile into money-making and money-losing companies, based upon net income in 2022: Again, the numbers tell a story, with the money-making companies in the largest market cap decile accounting for almost all of the gain in market cap for all US equities; the market capitalization of these large money-making companies increased by $5.3 trillion in the first six months of 2023, 97.2% of the $5.45 trillion increase in value for all US equities. Value and Growth Over the last decade, I have written many posts about how old-time value investing, with its focus low PE and low price to book stocks, has lagged growth investing, with high growth stocks that trade at higher multiples of earnings and book value delivering much higher returns than old-time value stocks (low PE ratios, high dividend yields etc.). In 2022, old-time value investors felt vindicated, as the damage that year was inflicted on the highest growth companies, especially in technology. That celebration has not lasted long, though, since in 2023, we saw a return to a familiar pattern from the last decade, with the highest price to book stocks earning significantly higher returns than the stocks with the lowest price to book ratios: [Image] Here are Some More Investing Tips and Resources. Enjoy! Sponsored [Wavy Tunnel PRO 2023 Trading and Mentorship Program Click Here to Check Out Jody's Curriculum and Bonuses... Join Now!]( [Market Resilience or Investors In Denial? A Mid-year Assessment for 2023!]( I am not a market prognosticator for a simple reason. I am just not good at it, and the first six months of 2023 illustrate why market timing is often the impossible dream, something that every investor aspires to be successful at, but very few succeed on a consistent basis. At the start of the year, the consensus of market experts was that this would be a difficult year for markets, given the macro worries about inflation and an impending recession, and adding in the fear of the Fed raising rates to this mix made bullishness a rare commodity on Wall Street. Markets, as is their wont, live to surprise, and the first six months of 2023 has wrong-footed the experts (again). The Start of the Year Blues: Leading into 2023 As we enjoy the moment, with markets buoyant and economists assuring us that the worst is behind us, both in terms of inflation and the economy, it is worth recalling what the conventional wisdom was, coming into 2023. After a bruising year for every asset class, with the riskiest segments in each asset class being damaged the most, there were fears that inflation would not just stay high, but go higher, and that the economy would go into a tailspin. While this may seem perverse, the first step in understanding and assessing where we are in markets now is to go back and examine where things stood then. In my second data update post from the start of this year, I looked at US equities in 2022, with the S&P 500 down almost 20% during the year and the NASDAQ, overweighted in technology, feeling even more pain, down about a third, during the year. Looking across company groupings, returns on stocks in 2022 flipped the script on the market performance over much of the prior decade, with the winners from that decade (tech, young companies, growth companies) singled out for the worst punishment during the year. While stocks had a bad year (the eighth worst in the last century), the bond market had an even worse one. In my third post at the start of 2023, I looked at US treasuries, the long-touted haven of safety for investors. In 2022, they were in the eye on the storm, with the ten-year US treasury bond depreciating in price by more than 19% during the year, the worst year for US treasury returns in a century. The decline in bond prices was driven by surging interest rates, with short term treasuries rising far more than longer term treasuries, and the yield curve inverted towards the end of the year. The rise in US treasury rates spilled over into the corporate bond market, causing corporate bond yields to rise. Exacerbating the pain, corporate default spreads rose during the course of 2022: While default spreads rose across ratings classes, the rise was much more pronounced for the lowest ratings classes, part of a bigger story about risk capital that spilled across markets and asset classes. After a decade of easy access, translating into low risk premiums and default spreads, accompanied by a surge in IPOs and start-ups funded by venture capital, risk capital moved to the sidelines in 2022. In sum, investors were shell shocked at the start of 2023, and there seemed to be little reason to expect the coming year to be any different. That pessimism was not restricted to market outlooks. Inflation dominated the headlines and there was widespread consensus among economists that a recession was imminent, with the only questions being about how severe it would be and when it would start. The Market (and Economy) Surprises: The First Half of 2023 Halfway through 2023, I think it is safe to say that markets have surprised investors and economists again, this year. The combination of high inflation and a recession that was on the bingo cards of some economists at the start of 2023 did not manifest, with inflation declining sooner than most expected during the year: It is true that the drop in inflation was anticipated by some economists, but most of them also expected that decline to come from a rapidly slowing economy, i.e., a recession and to be Fed-driven. That has not happened either, as employment numbers have stayed strong, housing prices have (at least up till now) absorbed the blows from higher mortgage rates and the economy has continued to grow. It is true that economic activity has leveled off and housing prices have declined a little, relative to a year ago, but given the rise in rates in 2022, those changes are mild. If anything, the economy seems to have settled into a stable pattern, albeit at the high levels that it reached in the second half of 2021. I know that the game is not done, and the long-promised pain may still arrive in the second half of the year, but for the moment, at least, markets have found some respite. During the course of 2023, the Fed was at the center of most economic storylines hero to some and villain to many others, with every utterance from Jerome Powell and other Fed officials parsed for signals about future actions. That said, it is worth noting that there is very little of consequence in the economy or the market, in 2023, that you can attribute to Fed activity. The Fed has raised the Fed Funds rate multiple times this year, but those rate increases have clearly done nothing to slow the economy down and inflation has stabilized, not because of the Fed but in spit of it. I know that there are many who still like to believe that the Fed sets interest rates, but here is what market interest rates (in the form of US treasury rates) have done during 2023: If there is a Fed effect on interest rates, it is almost entirely on the very short end of the spectrum, and not on longer term rates; the ten-year and thirty-year treasury bond rates have declined during the year. That does not surprise me, since I have never bought into the “Fed did it” theme, and have written multiple posts about why it is inflation and economic growth that drive interest rates, not central banks. As inflation has dropped and the economy has kept its footing, the corporate bond market has benefited from default spreads declining, as fears subside: As in 2022, the change in default spreads is greatest at the lowest ratings, with the key difference being that spreads are declining in 2023, rather than increasing, though the spreads still remain significantly higher than they were at the start of 2022. Stock Markets Perk Up: The First Half of 2023 I noted that risk capital retreated from markets in 2022, with negative consequences for risky asset classes. To the extent that some of that risk capital is coming back into the markets, equity markets have benefited, with benefits skewing more towards the companies and markets that were punished the most in 2022. To understand the equity comeback in 2023, I start by looking at the increase in market capitalizations, in US $ terms, across the world in the first six months of the year, with the change in market capitalizations in 2022 to provide perspective: In US dollar terms, global equities have reclaimed $8.6 trillion in market value in the first six months in the year, but the severity of last year's decline has still left them $14.4 trillion below their values from the start of 2022. Looking across regions, US equities have performed the best in the first six months of 2023, adding almost 14% ($5.6 trillion) to market capitalizations, regaining almost half of the value lost in last year's rout. In US dollar terms, China was the worst performing region of the world, with equity values down 1.01% in the first six months on 2023, adding to the 18.7% that was lost last year. The two best performing parts of the world in 2022, Africa and India, performed moderately well in the first half of 2023. In US dollar terms, Latin America was flat in the first half of 2023, though there were a couple of Latin American markets that delivered stellar returns in local currency terms, albeit with high inflation eating away at these returns. It is currency rate changes that explains that contrast between local currency and dollar returns, and in the graph below, I look at the US dollar's performance broadly (against other currencies) as well as against emerging market currencies , between 2020 and 2023; After strengthening in 2022, the US dollar has weakened against most currencies in 2023, albeit only mildly. US Equities in 2023: Into the Weeds! The bulk of the surge in global equities in 2023 has come from US stocks, but there are many investors in US stocks who are looking at their portfolio performance this year, and wondering why they don't seem to be sharing in the upside. In this section, I will start by looking with an overall assessment of US equities (levels and equity risk premiums) before delving into the details of the winners and losers this year. Stocks and the Equity Risk Premium I start my assessment of US equities by looking at the performance of the S&P 500 and the NASDAQ during the first half of this year: As you can see, why the S&P has had a strong first half of 2023, increasing 15.91%, the NASDAQ has delivered almost twice that return, with its tech focus. One reason for the rise in stock prices, at least in the aggregate, has been a dampening of worries of out-of-control inflation or a deep recession, and this drop in fear can be seen in the equity risk premium, the price of risk in the equity market. In the figure below, I have graphed my estimates of expected returns on stocks and implied equity risk premiums through 2022 and the first six months of 2023: After a year for the record books, in 2022, when the expected return on stocks (the cost of equity) increased from 5.75% to 9.82%, the largest one-year increase in that number in history, we have had not just a more subdued year in 2023, but one where the expected return has come back down to 8.81%. In the process, the implied equity risk premium, which peaked at 5.94% on January 1, 2023, is back down to 5% at the start of July 2023. Even after that drop, equity risk premiums are still at roughly the average value since 2008, and significantly higher than the average since 1960. If the essence of a bubble is that equity risk premiums become "too low", the numbers, at least for the moment, don't seem to signaling a bubble (unlike years like 1999, when the equity risk premium dropped to 2%). Sector and Industry The divergence between the S&P 500 and the NASDAQ's performance this year provides clues as to which sectors have benefited the most this year, as risk has receded. In the table below, I break all US equities into sectors and report on performance, in 2022 and in the first half of 2023: As you can see, four of the twelve sectors have had negative returns in 2023, with energy stocks down more than 17% this year. The biggest winner, and this should come as no surprise, has been technology, with a return of 43% in 2023, and almost entirely recovering its losses in 2022. Financials, handicapped by the bank runs at SVB and First Republic, have been flat for the year, as has been real estate. Communication services and consumer discretionary have had a strong first half of 2023, but remain more than 20% below their levels at the star of 2022. Breaking sectors down into industry-level details, we can identify the biggest winners and losers, among industries. In the table below, I list the ten worst performing and best performing industry groups, based purely on market capitalization change in the first half of 2023: Download market performance in 2023, by industry The worst performing industry groups are in financial services and energy, with oilfield services companies being the worst impacted. The best performing industry group is auto & truck, but those results are skewed upwards, with one big winner (Tesla) accounting for a large portion of the increase in market capitalization in the sector. There are several technology groups that are on the winner list, not just in terms of percentage increases, but also in absolute value changes, with semiconductors, computers/peripherals and software all adding more than a trillion dollars in market capitalization apiece. Market Capitalization and Profitability The first six months of the year have also seen concentrated gains in a larger companies and this can be seen in the table below, where I break companies down based upon their market capitalizations at the start of 2023 into deciles, and then break the stocks down in each decile into money-making and money-losing companies, based upon net income in 2022: Again, the numbers tell a story, with the money-making companies in the largest market cap decile accounting for almost all of the gain in market cap for all US equities; the market capitalization of these large money-making companies increased by $5.3 trillion in the first six months of 2023, 97.2% of the $5.45 trillion increase in value for all US equities. Value and Growth Over the last decade, I have written many posts about how old-time value investing, with its focus low PE and low price to book stocks, has lagged growth investing, with high growth stocks that trade at higher multiples of earnings and book value delivering much higher returns than old-time value stocks (low PE ratios, high dividend yields etc.). In 2022, old-time value investors felt vindicated, as the damage that year was inflicted on the highest growth companies, especially in technology. That celebration has not lasted long, though, since in 2023, we saw a return to a familiar pattern from the last decade, with the highest price to book stocks earning significantly higher returns than the stocks with the lowest price to book ratios: [Continue Reading...]( [Market Resilience or Investors In Denial? A Mid-year Assessment for 2023!]( And, in case you missed it: - [Home Sales to Slow, Prices to Fall, Says Realtor.com]( - [A Guide to ETF Liquidation]( - [Bond Coupon Interest Rate: How It Affects Price]( - [Is Student Loan Debt the Next Financial Crisis?]( - [ICE and Black Knight Sell Optimal Blue Business to Comply With Regulator Concerns]( - FREE OR LOW COST INVESTING RESOURCES - [i]( [i]( [i]( [i]( Sponsored [Exclusive Report: Master Uncertain Markets]( In the world of investing, uncertain markets can be downright terrifying. The fear of losing your hard-earned money can keep you up at night, and the anxiety of not knowing what tomorrow holds can be overwhelming. But what if you could take control of this uncertainty and turn it to your advantage? What if you could not only survive but actually profit from market volatility?[Go HERE to see the Potential Investing Opportunity]( By clicking link you are subscribing to The Bullish Traders Newsletter and may receive up to 2 additional free bonus subscriptions. Unsubscribing is easy [Privacy Policy/Disclosures]( - CLICK THE IMAGE BELOW FOR MORE INFORMATION - [i]( Good Investing! T. D. Thompson Founder & CEO [ProfitableInvestingTips.com]() ProfitableInvestingTips.com is an informational website for men and women who want to discover investing and trading products and strategies to educate themselves about the risks and benefits of investing and investing-related products. DISCLAIMER: Use of this Publisher's email, website and content, is subject to the Privacy Policy and Terms of Use published on Publisher's Website. Content marked as "sponsored" may be third party advertisements and are not endorsed or warranted by our staff or company. The content in our emails is for informational or entertainment use, and is not a substitute for professional advice. Always check with a qualified professional regarding investing and trading guidance. Be sure to do your own careful research before taking action based on anything you find in this content. If you no longer wish to receive our emails, click the link below: [Unsubscribe]( Net Wealth Consultants 6614 La Mora Drive Houston, Texas 77083 United States (888) 983-9123