We are already into July and firmly in the summer holiday season. So far 2023 is flying by.
The halfway mark of the year is an excellent time to take stock of what happened during the first six months.
Learning from the past is a key habit in helping us navigate the financial challenges we will face in the future. It’s only by internalising these lessons that the mature investor can learn to say with confidence in the face of a crisis, “It’s never different this time.”
The first half of the year has given investors plenty to process—from banking turmoil to morphing yield curves to stubborn inflation prints.
Those with diversified portfolios of equities and fixed income were in a good position to benefit from both assets’ advances at the year’s midway point, a welcome turn from last year’s broad declines.
What’s Happened So Far?
At the start of this year, it seemed as if the global economy might well be in a no-win situation. Either central banks (the Federal Reserve, Bank of England, European Central Bank) would increase interest rates enough to stamp out inflation, thereby plunging us into recession. Or they would relent, avoiding recession but permitting inflation to burn on. In either case, we were assured that corporate earnings must be about to decline significantly, boding ill for the stock market.
To this apparently intractable situation, the first half of 2023 added two new and potentially critical uncertainties: the spectre of U.S. sovereign default and a wave of bank failures that seemed to threaten the banking system itself.
Yet after enduring that relentless onslaught of crises real and imagined, the S&P 500 closed out the first half of 2023 up 16.09% bouncing back from a two-year low in October and shifting from bear-market to bull-market mode, reaching a gain of more than 20% from the prior trough The Eurostoxx 600 is up 5.82%. Only the UK has lagged (down 2.83% year to date.
Among the strongest performers so far in 2023 have been technology stocks, recovering after a poor showing in 2022. The tech-heavy Nasdaq has risen 32.3% in local currency terms until the end of June. Much of the stock market’s gain can be attributed to just a handful of companies, led by NVIDIA, which saw strong chip sales as interest in AI built.
Global stock markets also bounced back after posting their worst year since the financial crisis. Worldwide equities, as measured by the MSCI All Country World Index, rose 7.8% until the end of June, in GBP terms. Developed stocks, as represented by the MSCI World Index, added 8.9%, while emerging markets lagged, with the MSCI Emerging Markets Index down 0.8%.
Globally, value stocks and small caps started the year outperforming growth and large-cap stocks, respectively, but underperformed across the full period. However, it’s important to keep value’s recent performance in context. Last year, value outperformed growth by the largest one-year margin since 2000. Meanwhile, large-cap stocks have outpaced small-caps so far in 2023. Historically, small caps and value stocks have outperformed over the long term.
While the exact market dynamics will never repeat, we know that they rhyme. So, for the benefit of our financial future, we reflect on three lessons we believe are worth memorialising.
1. Trying to time the market is a fool’s errand
- Our human minds are wired to extrapolate the present into the future.
- During a market crisis, we assume that further declines are inevitable and during a bull market, we assume that the good times will continue forever.
- However, acting on this premonition by trying to time the market is futile.
- What we’ve seen time and time again is a reversion to the long-term average in advance of clear economic evidence that the worst is over.
- Those who reacted late last year, expecting further stock market declines, have sacrificed years of independence that will now have to be regained.
2. The future is always uncertain
- You could be forgiven for thinking that, with markets stabilising, the future must look brighter.
- You’d probably be surprised to find out that despite recent gains, the future is no more certain than it was eight months ago at the trough of the decline.
- Inflation is still a challenge and we are likely to see further interest rate increases.
- The war in Ukraine is still ongoing.
- A recession is still expected by many.
- Take comfort that the biggest companies, with the best management, are actively thinking of new ways to overcome the current challenges
3. Proactive planning is the antidote
- While we are unsurprised about the stock market’s recent recovery, we do not know what the short-term future holds for global investors. Indeed, we never will.
- While unsuccessful investors are continually reacting to current events, our approach is to remain steadfastly focused on our long-term goals by proactively acting on a plan.
- The principles underpinning this plan are patience, discipline, and rational optimism inspired by a long history of human ingenuity.
Looking Ahead
With six months to go, some questions appear likely to capture investors’ attention for the second half of 2023.
What’s ahead for the economy in the US and elsewhere? Will the new bull market charge ahead or take a breath? How long will investor enthusiasm last for all things AI?
What investors do know is that markets will continue to quickly process information as it becomes available. A long-term plan, one focused on individual goals and built on confidence in market prices, can put investors in the best place for a good experience, whatever may be in store, the second half of 2023 will surely bring us new and different challenges.
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