Opinion - Markets

Op-Ed: No one saw the S&P 500 surging 14% in the first half of 2023

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No, I didn't predict the 14%, six-month return for stocks, and neither did anyone else. Not anyone!

Even the raging bulls would whisper only 10%, and that was for the full year. I always offer 10% estimates for the prospective year's returns. It has been a fairly reliable number, year in and year out, and best of all, almost no one remembers any of these January predictions by the following December. But I didn't guess 10% for this year. I guessed flat. Even. And I thought I was being optimistic.

Recession MIA

Rather than offer my litany of dour details that had me feeling so blue, let's figure out what I and others missed. The answer is that I'm still not sure. My dour details were true and remain true. They are the guests who we're sick of and who won't leave, so we just do our best to ignore them.

This damned recession should be upon us, but it's not. I asked former Richmond Federal Reserve President Jeffrey Lacker why we hadn't had a recession, and he said, "Because the Fed hasn't raised rates far enough." 

But the lack of recession alone isn't reason for the surging stock market. Frankly, I'm not sure what is.

Throughout 2022, brilliant strategists explained higher interest rates were bad for tech companies, yet a handful of tech shares have been responsible for most of this year's gains despite higher rates.

The seven-largest companies in the S&P 500, all tech companies, are up 86% on average year to date!  Meanwhile, the other 493 companies in the S&P 500, in aggregate, have barely moved this year. Solid, blue chip, defensive stocks outside the tech sector have mostly languished. Why ignore these perfectly good companies, and why the tech pile-on? It wasn't that money had nowhere else to go. It had 5% Treasury bills and suddenly tasty money market yields. 

As you review your 7% or 8% returns for the first six months, do you chastise yourself or your manager or do you yell at the top of your lungs when you're alone in your car and there aren't other cars nearby to see you yelling like a crazy person? I may have done that once or twice — it feels great!

The answer is that if your investment horizon was the six months ending this June 30, then you really messed up if you're not up 14%. But, if your horizon is longer term, you have to wait and see. 

Aberrational first half

Over many years, stock market returns have lots of periods of inexplicable volatility that fade into reversions to the mean. I suspect this period will be seen in hindsight as having been aberrational.

Moreover, I believe those shares that have not participated in this stunning rally will have their day. As Warren Buffet likes to remind us, in the short run, the market is a voting machine while in the long run, it is a weighing machine. Time will tell, but we are finding many extraordinary companies that aren't up 90% year to date.

Don't get me wrong, I hate not being up 14%, but I wouldn't have been able to tolerate the risk necessary and I didn't need to take those risks. In fact, clients expect us to avoid unnecessary risks and keep them safe.

More than ever, I believe in owning those individual companies that are well-managed, have fortress-like balance sheets and are growing their bottom lines. Good investors don't change disciplines to match market fads. Good investors adhere to time-tested disciplines through the fads, so they may enjoy the benefit of hard-won lessons and solid long-term returns.