Three Surprises in 2023
Key Takeaways
After sharp declines in stocks and bonds in 2022, market recovery in 2023 is a perfect reminder that markets are never oblivious let alone predictable.
For many investors, despite a remarkable year in the S&P 500 your personal performance may be lagging behind.
Bonds also recover some losses and now provide improved risk-return ahead.
2023 stands in sharp contrast to 2022. In 2022, stocks and bonds declined by double digits. Investor sentiment suggested more of the same for 2023. In contrast, the US economy continued to grow, supported by a resilient consumer. Consumers' spending spree included shopping, travel as well as shelling out big dollars for events like the Taylor Swift Eras Tour. As the economy surprised for the better, so did the markets.
2023 is a perfect example that markets are never obvious, let alone predictable. In this edition, we take three market trends that reversed sharply from 2022 and some lessons from Taylor Swift as we reflect on her success.
A Sharp Reversal
Amid the 2022 bear market, investors piled into dividend-paying stocks, which are primarily viewed as safer, providing steady income from stable companies. Dividend stocks outperformed the broader market in 2022 by falling less than the S&P 500. However, this trend reversed sharply in 2023. So far in 2023, investors have instead piled into technology stocks amid the artificial intelligence frenzy, sending the S&P 500 Index up nearly 21% through November 23 while high quality dividend stocks remain in negative territory.
Source: Factset. YTD data as of November 30, 2023.
Uneven Markets
For many investors, despite a remarkable year in the S&P 500, your personal performance may be lagging behind. The reason lies in the dominance of the so-called "Magnificent 7"—Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta. Astonishingly, these seven giants, which make up nearly 30% of the S&P 500 Index, have generated a cumulative return of 72%, while the remaining 493 stocks have generated 9%, less than half the S&P 500 returns. This trend is a sharp reversal from 2022, when the Magnificent 7 suffered losses.
Source: AssetMark, Bloomberg. YTD data as of December 1, 2023.
Better Risk and Return for Bonds
After falling 13% in 2022, US bonds gained 1.6% through November, despite increased volatility and wild swings in interest rates. Ten-year Treasury yields started the year at 3.5% and fell to a low of 3.25% in the wake of the April banking crisis. Subsequently, the ten-year Treasury yield rose to 5.02% in October on surprisingly strong economic growth before retreating to 4.27% in November.
Looking ahead, with interest rates between 4% to 5%, the income generated from coupon provides a much better cushion from potential future losses due to rising interest rates. The next chart shows the risk and reward from a 1% interest rate move up or down in October 23 vs. March 22 before the Federal Reserve began hiking interest rates. In October 23, a 1% increase in interest rates would lead to a loss of 0.7%, unlike a loss of 4.6% back in March 22. Similarly, the return potentially has also improved should interest rates fall in the event of a recession. With the worst of inflation behind us, interest rates have likely peaked, improving the risk-return for bond investors.
Source: AssetMark, Bloomberg. Index: Bloomberg US Aggregate Index.
Get Ready for 2024
Taylor Swift's fans, who were strong enough to weather the terrible markets of 2022, would have fared well had they followed her advice when she sang 'All You Had to Do Was Stay' – invested, that is. For investors, it's important to remember that the markets are dynamic, and trends can change sharply. It's critical to stay true to your own investment strategy relative to your goals, even if it means going against the crowd. Regardless of whether your specific investments were the winners in 2023, Taylor Swift, with her remarkable Eras Tour, reminds us it's time to 'Shake It Off' and look ahead. In this final edition, we wish all our readers a happy and healthy holiday.
IMPORTANT INFORMATION
This report is for informational purposes only, and is not a solicitation, and should not be considered as investment or tax advice. The information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation alone cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against a loss. Actual client results will vary based on investment selection, timing, and market conditions. It is not possible to invest directly in an index.
Information presented here has been developed by an independent third party, AssetMark, Inc.
AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission. (C)2023 AssetMark, Inc. All rights reserved.