Wow, we’re halfway through the year already. So far, 2023 has felt very different to what markets went through in 2022. You don’t need reminding, but that year saw a brutal sell-off across both stocks and bonds, leaving 51 of the Investment Association’s 57 sectors in negative territory.
That’s certainly not the case as we head into the second half of 2023, following some strong gains in equities and the move of some indices into bull market territory (traditionally defined as a rise of more than 20%).
According to FE Analytics, 35 Investment Association sectors are up over the year to date. But is this the start of a new bull market?
At the time of writing, the average fund in the IA Technology & Technology Innovation is up 24.4% but this is a bit of an outlier. The next best sector is IA Latin America, but the average fund there has made less than half of the tech sector’s gain; all the other positive peer groups are up by single digits.
It’s been discussed many times over recent weeks but if we are in a new bull market, it’s looking like an incredibly thin one. The chart below shows the year-to-date performance of MSCI AC World indices of varying investment styles and market caps.
Performance by investment style and market cap in 2023
Source: FE Analytics
The 2023 rally has been largely confined to large-cap growth stocks, with their 18.9% rise (in sterling terms). Growth stocks further down the cap scale have made much smaller gains while value stocks have lost money.
The S&P 500 might have climbed more than 20% since October 2022, but the bulk of those gains have been made by a handful of tech stocks: Apple, Microsoft, Nvidia, Amazon, Meta, Tesla and Alphabet.
This doesn’t feel like a solid foundation for a sustainable bull market.
A couple of weeks ago, Fidelity’s Tom Stevenson gave some insight which I think is worth repeating here: “Either this is a bear market rally that has overstayed its welcome and the technology leaders will be hardest hit in the correction. Or the bull really does have legs, and the rest of the market has some catching up to do.
“Either way, a broad-based approach – an actively managed fund that favours smaller value stocks or an ETF tracking the equal-weighted index – looks like the safest option.”
I hope I’m wrong, but I’m slightly leaning towards Stevenson’s first scenario – there’s a decent chance of a correction in the second half of 2023.
Inflation in the developed world seems to be harder to contain than expected and further rate hikes are coming, increasing the risk of recession and deflating investor sentiment. Investors might be tempted to rotate out of stocks and into bonds, as fixed income yields sit at attractive levels and any economic slowdown pushes them towards perceived safe havens.
Still, my crystal ball is notoriously unreliable and it may well be that the bulls will continue running for some time to come. At the risk of sounding dull, the tried-and-tested rules stand today: take a long-term view, don’t chase yesterday’s winners and keep diversified.
Trustnet editor Jonathan Jones is back next week from his four weeks of paternity leave, so the weekly comment will be back in his hands. Thanks for listening to me over the past month and I hope the summer turns out better than my gloomy predictions!