The second quarter of 2023 continued the strong stock market performance that began in the fourth quarter of 2022. After a 20% decline from January-September of 2022, the S&P 500 has now posted positive quarterly returns of 7.6%, 7.5%, and 8.7% over the past three quarters. The tech-heavy NASDAQ 100 index bounced back from a 32% decline in 2022 to post the strongest first half on record, with a 39% return in the first six months of 2023.
Small-cap US stocks and developed market international stocks lagged US large-caps but still posted returns of 5% and 3%, respectively. Real Estate and Emerging Market stocks were up about 1% in the quarter. Bonds were slightly negative on the quarter as the economy continued to perform well, pushing any potential Fed rate cuts down the road. Commodities and Gold were the worst performers in the quarter, with declines of about 3%, as inflation continued to moderate.
In a sharp reversal from 2022, growth stocks regained their outperformance against value stocks this year. This reversal started in March this year when Silicon Valley Bank’s collapse began to pull down the banking sector while the Artificial Intelligence boom began to push tech stocks higher. The chart below from American Century clearly illustrates this sharp divergence from March 1 to May 31:
The banking crisis dominated news headlines in the first quarter, but the debt ceiling showdown took center stage in the second quarter. Politicians on both sides of the aisle used the threat of government default to try to push forward their policy agenda. The showdown ended the way they usually do, with both sides making some concessions and raising the limit to avoid financial catastrophe.
If you were focused on these scary headlines this year, you might be surprised by how well the markets have performed. We’ve previously discussed why you shouldn’t be surprised by anything in the markets, but have you ever wondered why it always feels like things are worse now than they’ve ever been? A new study by Adam Mastroianni and Daniel Gilbert might help us understand this better. As the title of their NYT opinion piece says, “Your brain has tricked you into thinking everything is worse," and they identified two reasons why this happens:
These two biases combine to give us the worst possible outcome. We focus on the negatives in the present day, but the negativity in the past tends to fade quickly, while the positive memories are the ones that stick with us. This leaves us always feeling like the past was better than the present. There are many examples of this in everyday life, and I was struck by how well the hit 1989 song by Billy Joel, “We Didn’t Start The Fire,” captured this idea.
The song is in the news again after the pop-rock band Fall Out Boy released an updated version, so I decided to research what prompted Billy Joel to write the original. As he explains in the next video, Billy Joel had just turned 40 in 1989 and he was talking to a friend who had just turned 21. The friend thought 1989 was a terrible time to turn 21. Joel told him he felt the same way when he turned 21 but the friend told him he was lucky to grow up in the 50s when nothing happened. Joel responded, “Wait a minute, didn’t you hear of the Korean War or the Suez Canal Crisis?”. This friend was focused on the negativity of the current day and ignored the negativity in the past.
What can we learn from this story and the research study, and how can we use it to help us make better financial decisions? First, remember that there has always been bad news, and there always will be bad news in the world. As the song says, “The world’s been turning since the world’s been burning… when we are gone, it will burn on and on and on” Try not to focus on the negative news in the present, and don’t let scary headlines drive your financial decisions.
Next, remember that in the future, you’ll likely remember the positive things happening to you right now much more than the negative. Spend your time and money making positive memories and embracing the good news in your life because 20 years from now, you won’t remember or care about the great debt ceiling debate of 2023!
As always, we are here to help you deal with these natural human biases that can make it so difficult to navigate the markets. We can’t make you forget the negative events in the news every day, but we can help put them in perspective so you can stick to your long-term financial plan. Feel free to reach out to us anytime to talk.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.