S&P 500: 2023 performance ytd vs. full-year 2022

Yesterday I got a note from one of the big domestic brokerage houses, a place where my wife and I have some retirement money. The note said, in effect: the S&P index is up 18% ytd!! (and ~19% total return) and aren’t things great. We’re great, too. It forgot to mention that in January it was warning about the danger in holding stocks and touting the attractiveness of shifting to Treasuries. It didn’t mention either that Treasuries are more or less flat so far in 2023.

Strategists, many of them people who have tried their hand at money management but weren’t that good, were uniformly bearish about stocks over last winter. Now the last of them appear to be capitulating and raising their yearend S&P targets. They’re still predicting bad times for stocks, but now “bad” means something like a return to the level at which the S&P exited 2022.

This wholesale reversal is typically not a good thing for the stock market, where a consensus usually reflects thoughts that are fully factored into today’s stock prices. The trick to investing success for you and me, though, is not just to recognize that the consensus is wrong. It’s in figuring out how it’s wrong.

My guess is that the overall market will be flat for a while and that gains will come from identifying individual companies with strong earnings growth. My sense is that medium-sized US-centric companies, ones that are flexible enough to take advantage of structural change, and especially ones in non-tech industries, are a good place to look.

Anyway, I decided to look at the degree to which the gains in 2023 are just bounce back from losses in 2022. The eleven sectors, through yesterday, look like this:

2023 to date full-year 2022

IT +44.2% #9 -27.6%

Communication services +36.1% #11 -36.7%

Consumer discretionary +33.1% #10 -36.2%

Industrials +12.0% #5 -5.5%

Materials +7.7% #7 -12.3%

Real estate +3.8% #8 -26.1%

Financials +3.3% #6 -10.5%

Staples +1.4% #3 -0.7%

Healthcare -0.9% #4 -2.0%

Utilities -4.4% #2 +1.6%

Energy -4.8% #1 +64.6%

S&P +18.1% -18.0%

First, a note about basic arithmetic: if you lose 18% in year one and gain 18% in year two, you’re not back at breakeven. You’ve lost 2.2%

Not a big deal. But if you’re in a fund that loses 50% in year one and gains 50% in year two, you’ve lost a quarter of your money. The fund has to double in year two to get you to breakeven, because it’s only working with the 50% that’s left of your initial investment.

Still, what I’m doing above is a slightly apples-to-oranges comparison. The biggest distortion is with IT. Of the barn-burning 2023 first half+, it takes 38 of the 44% up in 2023 to get back the losses from 2022.

Other than Energy, there are no big two-year winners. Materials, Real estate and Financials have done the worst.

I think what Wall Street strategists got wrong in predicting a 2023 market crash was not the “concept,” the macro environment, which isn’t hugely bullish. It was the “valuation,” how much you were being asked to pay for a product that was all dented up. It wasn’t earnings growth; it was book value.

My guess is that this market phase is now in the rear view mirror (or the back-up camera) and that sideways from here is the best assumption.

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