What 2022 took away, 2023 gave back. For those investors who appreciate symmetry in numbers, the last 18 months have been incredibly satisfying. In 2022, the twelve-month return of the three major indices (NASDAQ, S&P 500, and The Dow Jones Industrial Average Index) was -32.51%, -18.31%, and -6.86% respectively. In the first six months of 2023, the return for these same indices was 32.32%, 16.88%, and 4.94%; look familiar? In investing, this would be called a “round trip.”

If an investor had contributed $100,000 in each of the NASDAQ, S&P 500, and The Dow Jones eighteen months ago, which would have been the better investment? The answer – The Dow Jones Index would have retained the most value (and provided the least volatility). In the hypothetical example above, the investor would have the following balances after a year-and-a-half:

NASDAQ = $89,300

S&P 500 = $95,690

The Dow = $97,730

This reflection on stock market performance since the beginning of 2022, serves to illustrate the following concepts:

  • Making investment changes based on recent performance can be catastrophic.
  • Dance with who brought you to the dance – Stick with the asset class you are best suited for over the long-term. Moving from one asset class to another during volatile times can negatively impact long-term performance.
    • If an investor had invested in the best performing index eighteen months ago, or sold the worst performing index six months ago, the investor’s total return would be much worse than holding the same index the entire time.
  • The large swings of the NASDAQ (and its constituents) capture the headlines, but other indices may be better options in terms of risk and return.
  • Successfully timing entry and exit points into and out of stocks is nearly impossible. The most recent turnaround began in September 2022 when the economic outlook appeared the bleakest.

For the first half of 2023, investors shrugged off a federal reserve intent on cooling inflation, set-aside the remaining instability in the banking sector, and ignored the threat of an economic slowdown. By June 30th, the NASDAQ had added 13.05% for the quarter to be the best performing index. The S&P 500 and Dow Jones Industrial Average gained 8.74% and 3.97% respectively, during that same time period.

Interest rates resumed trending higher as the yield on a ten-year U.S. Treasury began the second quarter yielding 3.47% and ended the quarter at 3.84%. The yield curve remained inverted as yield on a three-month T-Bill was 5.30% on June 30, 2023. Although bad for borrowers, these short-term yields were a welcome development for individuals needing highly secured interest income.

Looking Forward

The V-shaped pattern that was recently completed on the major indices should be insightful for investors going forward. For individuals requiring the emergence of a positive stock market stock pattern, the previous nine months could provide enough encouragement. For investors who have been waiting to invest throughout the last two years, hoping for correction, they should also be pleased with the major market decline of 2022. Lastly, the investors who held or added to their stocks are most likely in good shape as well. The effect of having all these satisfied investors is that there should not be a lot of selling pressure in the near future, which gives stocks the opportunity to climb higher. However, investors still need to conduct thorough analysis and remain selective. The recent banking crisis in March of this year reminded all of us that risk management and sector weighting should always be a priority.

D’Arcy Capital continues to find potential investment opportunities in small cap stocks, international stocks (both developed and emerging), value stocks, municipal tax-free bonds, U.S. T-bills, companies investing in artificial intelligence and metaverse technologies.

For investors looking for an alternative to the waning dominance of growth stocks, or who view the S&P 500 as still too expensive, should consider a portfolio of value stocks. A well-designed portfolio of large cap value stocks could have an average price-to-earnings ratio of less than 12 times, a price-to-book ratio under 1.25 times and generate a yield more than 3.75%.

D’Arcy Capital is less excited about large U.S. based growth stocks, maturing technology companies, and fringe opportunities such as crypto, NFTs, and structured products.

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