Introduction
Despite economic and political challenges year to date, both in the U.S. and Global Equity market returns have been positive.
Market Concentration
In prior articles, we wrote about multiple economic and political challenges that led to volatile markets in the first half of 2023. Yet despite the volatility, market returns have been robust thus far in 2023. A narrow group of technology stocks primarily drove stock market returns.
As of Friday, June 23rd, the Nasdaq 100 had risen by 34.91% for the year. However, the top 10 stocks accounted for 59.6% of the index. Furthermore, the majority of the year-to-date return came from these top 10 stocks. On an equal-weighted basis, the index returned 15.6%. Similarly, the S&P 500 earned a return of 12.95% for the first half of the year. Because of the concentration represented by the top 10, on an equal-weighted basis, the return was only 1.89%. Capital-weighted indices like the Nasdaq 100 and S&P 500 typically see the largest stocks driving performance. However, as of early June, 76% of the stocks in the Nasdaq 100 index and 85% of stocks in the S&P 500 had under-performed the overall index. Hemispheres Investment Management (HIM) closely monitors market data and sees potential investment opportunities in this discrepancy in performance among stocks.
Positive Factors
Hemispheres remains optimistic about the rest of the year. Resolution of several economic and political factors contribute to optimism:
- Congress completed a US debt ceiling agreement that will be in place throughout the year.
- The Federal Market Open Committee (FOMC) paused rate increases for the immediate future.
- Stabilization of stresses on the banking system.
- Signs of easing tensions between China and the U.S.
Risk Factors
However, given the strong returns in the first half, lower returns in the second half wouldn’t be surprising. Several factors could contribute to this:
- With Federal Reserve rate increases, the yield curve is inverted, indicating slower economic growth in the future.
- Tightened bank lending standards could lead to reduced access to credit, slowing corporate earnings, and affecting stock prices.
- The significant performance of companies involved in Artificial Intelligence in the first half may represent a bubble.
Conclusion
HIM focuses on investing in industry-leading companies with solid financial fundamentals, aiming to achieve consistent performance over time. As always, we would be happy to consult with you and answer any questions that you may have. We offer a free consultation concerning your investment planning. Book a meeting
