Befuddling Markets So Far This Year


In years like 2023 that are marked by excessively narrow returns (only a handful of stocks are driving broad index returns) it can be helpful for people to understand the market undercurrents…. particularly for those who hold the stocks that have not participated in the rally.

First, let’s consider the third quarter 2023. Here’s what has transpired in various markets though the end of the third quarter. Stocks were down in the US, with the Russell 2000 Index (small companies) leading the way down. Like 2022, bonds provided no protection in the third quarter, with the Bloomberg US Aggregate Bond Index dropping -3.2%.



On a year-to-date basis, those same indexes look a little different. The NASDAQ Index is up a whopping 27%, the S&P 500 is up a respectable 13%, while the Russell 2000 Index is posting a rather anemic 2.5% return, and bonds are losing money!



We can draw the following conclusions from the chart above: 1) Technology stocks are dominating market returns as the tech-heavy NASDAQ is soundly outperforming all others, 2) Larger cap stocks are doing well as evidenced by both the NASDAQ and the S&P 500 Index, 3) Smaller stocks are lagging as the Russell 2000 is not keeping up with inflation, and 4) More conservative investors are being treated more harshly than other investor types as evidenced by the negative returns to bonds. But there are more undercurrents to examine within the US Equity markets, which we turn to next.

The chart below shows two versions of the S&P 500 Index: 1) An equal weighted version (meaning all stocks have an equal weight inside the index) in purple and 2) A size weighted index (meaning the bigger companies have larger weights in the index in proportion to their size) in orange. The equal weighted index has essentially a flat return for the year while the size weighted index (the one the media commonly reports on) is up. All the positive returns this year have been concentrated in a small number of big cap tech stocks! If you don’t own those stocks, you have simply been left in the dust! But there is even more to consider.



Below are a series of year-to-date returns for different styles of investment. All of the indexes below are size weighted. Large Cap Growth stocks have dominated (green line), while Large Cap Value stocks (pink line) have lagged. Perhaps most interesting, the most conservative types of stocks, the so-called Dividend Aristocrats stocks (orange line = large caps and blue line = mid-caps) have lagged and in some instances have been negative so far this year. For 2023 so far, more conservative investments (bonds and dividend growth stocks) have been harshly treated while more risky investments have fared better.



What are we to make of markets like 2023? For one, investing is an uncertain proposition. Sometimes confounding things like 2023 can happen. It does seem unfair that more conservative portfolios can suffer flat or negative returns even while more expensive (high PE), and more speculative (no earnings) portfolios thrive. Our takeaway is sometimes, especially over short-term horizons, weird things can happen in the capital markets.

We firmly believe chasing those weird things by abandoning your risk-based portfolio strategy for fear of missing out will probably make things worse for you, not better. Eventually, equity markets will become healthier and broaden out. A true bull market will lift all stocks. Stick with your knitting, especially in times like these where capital market returns befuddle more than they reward.





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