Forgotten parts of the market lead the way in 2023 as advisors wrestle with how to play the economy

Published Tue, Feb 7 20238:22 AM ESTUpdated Tue, Feb 7 20239:50 AM EST

It's the second day of the Exchange ETF conference in Miami Beach and 2,000 registered investment advisors and ETF providers are all trying to figure out what the major themes in investing will be for 2023. It's a confusing time for the professional investing community. Everyone here is amazed at how forgotten segments of the market have rebounded in 2023: international, growth, small cap and bonds. 2023 Leaders (Were 2022 Laggards) S & P 600 Small Cap + 14% S & P 500 Growth + 7% International (VEU) + 7% US Bonds (AGG) + 3% It's clear the market wants to believe in a soft landing, but there's not a lot of conviction it will happen. Advisors here are having a hard time wrapping their heads around the idea that there would be a recession in 2023, and now maybe not. "The market was convinced that recession was a 60%+ sure thing, but economic data continues to confound the recession camp," Kim Arthur from Main Management told me. "With real wage growth, large payroll growth and earnings beating expectations it equals a soft landing at worst and maybe no recession near term." The army of RIAs here seems unsure how to reprice the risk of higher rates from the Fed. Ten-year treasury yields are up 25 basis points since the Friday jobs report for January . The data is supporting a strong jobs market and the chances of a soft landing, but it is also supporting the "rates for higher" story . Most advisors here are coming to grips with Chair Jerome Powell 's insistence the Fed will not lower rates this year. At last Wednesday's press conference, he said, "My forecast is for slower growth, some softening in labor market conditions and inflation moving down steadily but not quickly. ... If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year." But the data is so strong it is now raising the prospect of the Fed having do do even more. This morning Federal Reserve Bank of Minneapolis President Neel Kashkari told CNBC that January's strong labor-market report means the Fed needs to keep raising rates . "Right now I'm still at around 5.4%," Kashkari said. That's well above the current level of 4.5% to 4.75% for the fed funds rate. Powell is scheduled to speak today, and to a person everyone here agreed Powell would reiterate they will not be lowering rates this year. Many RIAs are baffled about why the market is so strong. The S & P 500 is still 50 points above where it was on the day of the Fed announcement last Wednesday. The message seems to be, "We [the market] may have mispriced the risk of higher rates, but the economy is so strong it may be able to withstand the higher rates." Meantime, how much more is left in the tech rally of 2023? Even with modest declines Monday, tech is on a huge upswing this year. Tech in 2023: Rebound or rebound from tax loss selling? Tesla + 58% Meta + 54% NVIDIA + 44% AMD + 29% Netflix + 23% Amazon + 21% Micron + 20% Apple + 17% Alphabet + 17% Many of the advisors believe that much of that is just the natural tendency of the market to rebound in sectors that saw big declines in the prior year. Much of Wall Street seems to feel that way as well. "The YTD move is likely more due to the end of tax loss selling than anything fundamental," said Nicholas Colas at DataTrek in a note to clients. ETF guests 11 a.m. ET - Joe Hohn, head of ETFs at Dimensional Funds This is the 8th largest ETF provider with more than $80 billion in assets under management, one of the giants of "index plus" investing. Dimensional pioneered all the early investing in value, small caps and earnings growth. Its research comes from Nobel Prize winner Eugene Fama and the University of Chicago. Clients historically were big pension funds, and when they had mutual funds, they brought their mutual funds into the ETF space so the average investor could buy in. Very strong opinions on growth vs. value, small cap vs. big cap. 12:30 p.m. ET - Anna Paglia, head of ETFs and indexed strategies at Invesco Paglia runs the #4 ETF complex in the U.S., after iShares, Vanguard and State Street. Her Nasdaq 100 ETF (QQQ) is the 5th largest ETF with $160 billion in assets, with the Junior Nasdaq 100 (QQQJ) also gaining adherents. Their Equal Weight S & P 500 ETF (RSP) has also attracted significant inflows from investors wary of market cap weighted indexes. Low Volatility (SPLV) was a hit last year but may be struggling this year. 2:15 p.m. ET - Jan van Eck, VanEck CEO Van Eck is the king of commodities. His Gold Miners (GDX) , Oil Services (OIH) , Agribusiness (MOO) and Metals (REMX) are the top funds in the space. His Semiconductor ETF (SMH) is also the largest in its space. He'll talk about the big gold rally, oil stocks and semis. 4:40 p.m. ET - Tim Buckley, Vanguard CEO Vanguard has become a giant in mutual funds and ETFs and, while it is famous for its passive investing style, it also has a suite of well-known actively managed products. Buckley will talk about the outlook for returns in 2023, why bonds are again a competitive asset class, Vanguard's focus on long-term investing and why Vanguard has slowly challenged Blackrock for the role of top asset manager in the U.S.