After a negative year for most stock and bond investors last year, there was a definitive bearish bias going into 2023. Like the markets do so often, the consensus view was off track, led by the rebound of mega-tech with artificial intelligence as the key catalyst. The second quarter brought a surge in the NASDAQ that has not been seen in forty years.
The bargains going into the year are no more, especially in the higher risk segment that was so battered in 2022. It is interesting, however, that the dividend payers are the segment that has yet to participate and may now selectively offer the best overall risk-to-reward. The narrowest of the rally is best illustrated by the fact that ten stocks comprise 85% of all of the 2023 gains in the S&P 500. As more investors get positive into the second half of 2023, the keys will be: how much of an impact artificial intelligence will have and on a macro basis, can the U.S. avoid recession with the series of rotational sector downturns replacing a full-blown one?
Here is what we wrote in our 1st quarter 2023 report about the divergence between the winners and losers, as well as on inflation:
“Amongst all this volatility, the Dow Jones Industrial Average, S&P Mid-Cap 400 and Russell 2000 are little changed (up or down 1% YTD) into the first few days of April 2023. The volatility is continuing with U.S. Treasury yields currently materially lower from those attractive 5% short-term yields. Stocks are likely to continue their significant divergence between the winners and losers.
During critical times, it is always beneficial to look back to see who was aware of the risks and opportunities well ahead of the crowd. A few years back, the Fed was unaware of the dangers of spiraling inflation as it stayed with its transient theme, which only fueled the inflation flames we experience today. These delays in the Fed’s response only makes inflation now more difficult to control.”
Either way, a good portion of 2023’s gains have already factored in much of the positives. The third quarter has generally been the worst quarter, and that trend is likely to continue for 2023. As investors get more positive here, it is best to go against the consensus.
This more contrarian type strategy worked to start the year and will likely prove right as well into the second half of 2023.