The Size Factor is Driving Markets in 2023
So far, so good. Markets are regrouping at the halfway point of 2023 after a challenging twelve months in 2022 - a tough year for all asset classes.
The low point in this market cycle is now far behind us. The S&P 500 hit a 3,492 index low on October 13, 2022 nine months ago. (How many bought at that time to take advantage of attractive prices?)
Migrating through the mid-year point, we see markets trading around 28% higher than the 2022 lows.(1) Quite a recovery.
In 2022, scary world news chased out weak investors, as it often does, hence the low point in October last year. Panic selling during much of the last few years has not been profitable as the S&P 500 trades within single digits of its all-time high.(1)
What Now with the Fed Pausing?
The Federal Reserve is pausing its interest rate campaign based on signs the economy is slowing. This is evident from a slight pullback of consumer spending (which oddly enough includes claims that more top income earners enough are shopping at dollar stores(?).(5) Higher rates dampen valuations of all assets, including real estate, and, as noted below, this has had an effect on real estate sales in the last year.
Markets are Heavily Concentrated This Year
Markets are more concentrated in 2023.
There is some quirkiness to the S&P 500 index returns generated this year - nearly all of the 2023 return of this index through the end of May came from less than a dozen securities. If you didn't own them, you were likely flat to breakeven through the fifth month of the year. It's an interesting phenomenon...nearly 100% of the S&P 500's return from a mere 2% of its components. Investment history folks are suggesting it reflected the most concentrated market they've seen. The top ten largest are all the obvious companies: Apple, Amazon, Microsoft, Google, Tesla, etc.
Historically, the top ten largest stocks in the S&P 500 contribute about 5% of annual returns.(3)
Our impression is that, as with everything market-related, there is a regression back to the mean (the norm) as the year progresses. The euphoria over the biggest stocks (and artificial intelligence mania that occurred last month) will ultimately wane. The point at which regression actually occurs is outside of our crystal ball jurisdiction.