The Stock Market Year to Date Has Defied Expectations: What Could Change?

The stock market year to date

There are three things to look at here.

The top four companies, which collectively make up over 20% of the S&P 500, have outperformed the broader index by around 30%, good for people who are overweight large cap companies.

The S&P 500 is nearly reaching $4,300, a call that few analysts predicted at the start of the year.

Here is one analyst take from earlier this year, “There is good and bad news for equity markets and more broadly risky asset classes in 2023. The good news is that central banks will likely be forced to pivot and signal cutting interest rates sometime next year [This has for the most part come true], which should result in a sustained recovery of asset prices and subsequently the economy by the end of 2023. The bad news is that in order for that pivot to happen, we will need to see a combination of more economic weakness, an increase in unemployment, market volatility, decline in levels of risky assets and a fall in inflation. All of these are likely to cause or coincide with downside risk in the near term. [This was not true].” - Marko Kolanovic, Chief Global Markets Strategist at JPMorgan

The bottom 490 companies in the S&P 500 have contributed virtually nothing to the index's performance.

The stock market’s second half?

It is hard to see, with the uncertainties at hand, how the market could continue to go up into the rest of the year.

However the companies in the market are producing better than expected financials and consumers are still resilient. Could those two things alone push back worsening conditions, while the Fed has hit it’s peak in rates?

Here’s a chart with some statistics on the >7% returns in the S&P 500 and the coinciding rest of the year. In most cases the markets have continued to rally.

If the market continues, what performs?

And this brings me to my last point. If we continue to see a rally, how and who is to benefit.

For one, obviously, people who are still invested benefit. Those who sat/are sitting on the sidelines at the end of last year and beginning of this year are chasing these returns. Those who have remained invested are benefiting from those who didn’t.

But from here will it be the top 10 companies in the S&P like we’ve seen? Or will it be the bottom 490, the underperformers? *if we see gains.

If it is the top 10 only, that’s is pretty unhealthy from a market perspective, but if it is the bottom 490 that could mean those who are overweight large cap companies (which tends to be most people) may not perform as well for the remainder of the year.

Truth be told there is still the risk that something [more] breaks in the economy that causes everything to contract, and in that case this post is irrelevant. That risk is reasonably high.

I believe if we achieve a soft landing, we will continue to see a rally particularly in the large caps.

If we see a recession, especially one that is heavier, I could see the gains in the big names taken away and modest downward pricing in small and mid caps.

Bonds are beautiful in that environment because of the flight to safety.

The best things that can be done are regular rebalancing (take your profits as they come), don’t take stupid risks (bonds maybe should take up more of your portfolio at 5% rates), and diversify across sectors and asset classes (the easiest way to reduce the risk of financial ruin).