The market performed surprisingly well year to date, despite a continuing rising interest rate environment, continuing global conflict and a widely anticipated recession. Technology stocks have rebounded in the first half of 2023 resulting in very strong returns for the NASDAQ (up 37%) and S&P 500 indices (up 15.4%). Overall year to date returns were positive for all asset classes except for commodities which were down 8.7% through June 2023. Over a five year period average annual returns for all asset classes were also positive. Returns for publicly traded ETFs representing each of these investment types is shown below.
Large cap stocks were up 15.4% year to date, largely driven by technology stocks and the rapid proliferation of artificial intelligence. International stocks also did well year-to-date (up 11.2%). Traditional value stocks, a safe haven in 2022, were up only slightly for the first half. Fundamental weighted US and international stock funds did well (up 7.8% and 11.2% respectively. These indices are a blend of value and growth (or growth at a reasonable price). Small capitalization and mid-cap stocks were up on average about 4% year to date.
Bond funds averaged close to a 2% return year to date. One year U.S. Treasury Bills are currently paying 5.4% annually.
Commodities were down for the last six and 12 months as prior inflationary pressures subsided. Real estate funds rose 3% year to date but are still at a loss for the last 12 months.
The markets remain volatile. The Fed is still tightening monetary policy and could raise interest rates further. There remains the possibility of a recession. I would expect stock returns to be more modest for the remainder of the year with a continued potential for another downturn. As a result, I would remain defensive at this time with a bias towards stocks and stock funds of companies with strong fundamentals (earnings and cash flow) and reasonable prices relative to growth and fundamentals. A continued bias to shorter term bonds – particularly shorter-term U.S. Treasuries paying 5% interest is also in order. As economic news continues to be good and if a recession can be avoided it will be time to start considering shift to longer-term bonds (intermediate bonds).