The State of Equity Markets in 2023
Hello everyone. Hope all is well.
Here is the next edition of 3 Questions for Bill Richardson.
Question 1: Equity markets are off to a great start in 2023. What’s happening?
Equity markets have taken us on a rollercoaster ride since COVID’s appearance in 2020. First, markets got rocked. Then, they recovered strongly. Then 2022 (say no more) and now 2023 looks like another recovery year.
Starting with the long-term picture, the S&P 500 is up over 6.5% annualized (at the time of writing) since January 2020 (before the initial drop). So, longer-term investors, who avoided panic, have achieved performance within an accepted range of 6 – 8%. Now, for those who said they bought at the bottom of the market in March 2020, they have done over 21% annualized, but I know more people who said they did it than actually did and held on for the ride.
Looking at 2023, the S&P 500 total return is up 10.3% but it was up 9% by February 23rd, only to give back all but 1% by March 10th.
Question 2: What has been driving the gains?
For 2023, that’s the important question. Performance this year has been very concentrated. That is, only three sectors have beaten the index. Technology is up over 27%, Communications (which is very technology-based) is up 22% and Consumer Cyclical is up 12%. Of the other 8 sectors, only one (Real Estate) is positive at under 3% and some like Industrials (down 10%) and Utilities (down 8%) have been pretty negative this year.
The technology sector makes up 28% of the S&P 500, Consumer Cyclical 10% and Communications 9%. The top 10 companies in the S&P 500 make up over 31% of the index and it is dominated by Technology (3 companies), Communications (2 companies), Consumer Cyclical (2 companies), and one each in Energy, Healthcare and Financial Services. Many might say that Alphabet (Google), META (Facebook), Amazon and Tesla are technology companies.
The top 10 companies in the S&P 500 are up, on average, almost 51%, with NVIDIA up 174% and META (Facebook) up 118%.
So, the 2023 performance has been driven by the big boys and if you have been in the top three performing sectors, you are doing well.
Here’s a bit of a shocking statistic. If you own the S&P 500 (total return), you are up almost 10% YTD. Now that is a cap-weighted index as described above. If you own the same index, but equal weighted (each company has the same weighting), you are up 0.22%. The TSX 60 index which has little in the way of technology companies is up 2.96% for the year.
Wonder why many mutual fund companies aren’t doing so well in 2023? Most are not going just to buy Technology and Communications and ignore all others. Most are not going to buy the 10 biggest companies. Some great managers, who have returned close to 20% per year prior to 2020, are just above break-even this year.
Question 3: What caused Technology-based companies to do so well?
In hindsight, there is one factor that ignited the Technology rally. AI (Artificial Intelligence). The rally started around the time that CHAT-GPT emerged on the scene. First, it ignited NVDIA which is thought to be the leader in microchips. NVDIA closed on May 24th at $305 and opened the next day at $382. That’s 25% in one day.
AI is going to have a huge impact on everything. It is a definite game-changer. What will be the full impact is yet to be determined. Only time will tell.
(Market information source: Ycharts.com)
Until next time,