It is time once again for my annual “Look Back” blog post where we take a walk month by month through the previous year, recapping some of the most talked about news headlines in parallel with the financial market performance.
January – Rescued at Sea
On January 16, 2023, Elvis Francois was found northwest of Columbia’s Puerto Rico Bolivar after being lost at sea for 24 days. Elvis survived on a bottle of ketchup and other condiments after weather conditions pulled him out to sea and he lacked navigational knowledge to find safety.1
Markets were rescued from a dismal 2022 in January 2023. The S&P 500 jumped over 6% to start the new year and developed international markets jumped by 8%, as represented by the MSCI EAFE. After a dreadful 2022, the Bloomberg U.S. Aggregate Bond index rallied by 3.08% in January 2023 as fixed income finally reached dry land.2
February – Chinese Spy Balloon
In late January and into the first few days of February, a Chinese spy balloon traveled across the continental United States presumably gathering data from sensitive military sites. The balloon was finally shot down off the coast of South Carolina and brought more tension to the already delicate relations between the United States and China.
Unfortunately, the air was also let out of the markets in February as the S&P 500 dropped by 2.5%. Emerging Markets dropped by 6.5% erasing most of the gain from January. In the fixed income space, rising rates pushed the Bloomberg U.S. Aggregate Bond Index down 2.6% in the month as fixed income worked remained positive.3
March – Silicon Valley Bank
In a sign of the perils of rising interest rates and deposit flight, Silicon Valley Bank, the bank of choice for many tech firms, was taken over by California regulators. Later in March, First Citizens Bank bought most deposits and loans of the failed bank. SVB, whose demise was fast and furious, was riddled with poor oversight, concentration of uninsured deposits, and interest rate risk.4
Markets were volatile in March as investors weighed the containment and health of banks. However by the end of the month, investors felt confident it was contained as the Federal Reserve needed to take a breather from raising rates in a volatile time. As such, the S&P rallied in the back half of March and finished the month up 3.67%. The international markets rallied by 2.64% as well. The lone major equity loser was the Russell 2000 representing smaller domestic companies; it dropped by 4.8% as many mid-size and smaller banks took it on the chin and pulled the index down.5
April – Unemployment Rate
The United States economy remains resilient in the face of rising interest rates. The unemployment rate dropped to an incredible low of 3.4%, a number not seen since 1969. Most estimates called for a modest uptick in unemployment given recent banking struggles and a cooling economy. Instead, we are presented with a moderating but persistent growth economy.6
The case for diversification was made in April as markets varied across several equity areas. The S&P 500 rallied by 1.56% while the Russell 2000 dropped by 1.8%. Emerging markets also tailed off in April and dropped by a little over 1% as China seems to have hit slower growth for longer after decades of unabated expansion.7
May – JP Morgan “Buys” Troubled Bank First Republic
First Republic Bank was not able to survive the turmoil of deposit flight even after receiving $30 billion in deposits in March from several of the nation’s largest financial institutions. It was the second largest bank failure in U.S. history, with the dubious number one honor going to Washington Mutual in 2008. Rest assured, the federal government stepped in and guided a sale to JPMorgan Chase, relieving depositors of any potential loss and expanding the footprint of one of the nation’s largest financial institutions.8
Despite the troubles in the banking world, the S&P 500 finished almost flat in the month of May as technology stocks carried the broader index through the turmoil. International markets were less fortunate without a strong technology base and dropped by 2.7%. As interest rates rose the Bloomberg U.S. Aggregate Bond Index dropped by 1.4% leaving fixed income investors seeking a rebound from 2022. 9
June – The Magnificent Seven
The Maginificent Seven was defined in the 2023 investor parlance as a term coined for the large technology stocks dominating the S&P 500. These seven stocks are Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta (Facebook), and Tesla. Despite respresenting less than 2% of the total S&P 500 names, the sheer size of the seven stocks represents over 25% of the market capitalization of the S&P 500 and hence drive the returns in a meaningful way. These seven stocks collectively rose by almost 61% through the first 6 months of 2023 while the S&P 500 was up a more modest 16.9%. The concentration of returns in the tech sector, and specifically these seven stocks, offers caution to investors of the risk inherent in such concentration.10
Markets finished a strong first half in 2023. The S&P 500 was a big market winner at 16.9% but the developed markets represented by the MSCI EAFE, provided a 12.16% return for the first half of the year. Smaller domestic companies and emerging markets were more modest but positive for the year. And the bond market settled in for a 2% return as fixed income investors remain cautious about rising rates.11
The first half of 2023 was driven by the S&P 500 large technology companies and a lack of breadth in other sectors and stocks. On the bond side, markets were hanging on to every Federal Reserve announcement hoping that interest rate increases would come to an end. Regardless, strong job numbers combined with modest growth in the economy kept investors relatively happy before volatility would appear in the second half of the year.