The S&P entered a new bull market last month on June 8th when it first crossed the 20% rally threshold, and we ended the first half at new bull market highs. Nevertheless, we know it’s not how you start but how you finish that counts. The current bull market is now at 268 calendar days and counting, with a gain of 23%. As may be expected, bull markets have historically lasted much longer than bear markets, with the average bull since 1928 lasting over 1,000 days and seeing a gain of 114%. The average bear has only lasted 286 days (which was right about where the 2022 bear ended), with an average decline of -35% (quite a bit more severe than the -25% decline in 2022). Given where we are, we will take a quick look back at the first half of 2023 and then at what that might mean for the rest of the year.
With most of the current bull market coming this year, the first half has been quite strong, with significant moves in the S&P 500 (+15.9%) and the Nasdaq (+31.7%), driven by only a handful of the largest companies. Given the narrow breadth, the Dow Jones Industrial Average (+3.8%) and the small-cap Russell 2000 (+7.2%) lagged considerably. Digging into the performance of the S&P 500, the numbers are staggering. The top seven companies (Apple, Microsoft, Nvidia, Amazon, Tesla, Meta, and Alphabet), as measured by total S&P 500 contribution, made up over 70% of the total return. Or said another way, without those top seven companies, the index would have only been up about 5%. And before anyone tells you, “Those are massive companies; they should be contributing most of the performance,” while that is true, these are huge companies; they are still massively over-contributing. Those seven companies made up about 25% of the total S&P 500 market cap throughout the first half, meaning they contributed almost 3x more than their size alone would dictate.
As we enter the second half of 2023, the S&P 500 index is now just 8% below its all-time high from January 2022. And while performance this week has been sluggish in response to continued strength in the jobs market (we know this doesn’t make sense on the surface; good jobs numbers imply a more robust economy, which in turn should mean better performance for companies, which over the long term should translate to higher stock prices), historical data related to future performance after a stellar first half would indicate that there could be room for additional upside.
To elaborate on this data, of the 78 years since the end of WWII, the S&P 500 has gained more than 10% in the first half 22 times (28%). Over the next three months (Q3 of each year), the average gain has been 1.7% after 10%+ first halves versus an average decline of -0.1% in all other years. Over the next six months (which takes you to year-end), the S&P 500 has averaged a gain of 7.7% in years where the index gained at least 10% in the first half, while the average second-half move in all other years has been less than half that at 3.1%. Moreover, six months out, the S&P 500 has been positive over 80% of the time following a 10%+ first half. As noted above, we are still seeing some “good news is bad news” reactions in the market as there is concern the Fed may over-tighten and cause a recession. So to be clear, this does not mean 2023 will behave the same as previous years that experienced strong first-half performance; every situation is different. However, strictly historically speaking, strength has tended to follow strength, so let’s look for another good half.
Economy
- U.S. equity markets got off to a sluggish start for the year’s second half, with the S&P 500 down -1.2%, the Nasdaq down -0.9%, and the small-cap Russell 2000 down -1.3%. The week’s biggest news was the ADP payroll numbers, which came in well ahead of expectations, sending a negative shockwave through the market as investors feared continued rate increases.
- In June 2023, U.S. private businesses unexpectedly added 497K jobs, marking the most significant increase since February 2022 and exceeding the forecasted 228K jobs. The services sector led the charge, adding 373K jobs primarily in leisure and hospitality (232K), trade/transportation/utilities (90K), and education/health (74K). However, there were job losses in information technology (-30K), financial activities (-16K), and professional/business sectors (-5K). Meanwhile, the goods-producing industry saw an increase of 124K jobs due to construction (97K) and mining (69K), despite a -42K decline in manufacturing.
- In May 2023, the number of job vacancies in the U.S. fell by 496K from the previous month, totaling approximately 9.8M, slightly below the market expectations of 9.9M. Despite falling below the 10M threshold, the openings remained significantly above pre-pandemic levels, indicating a tight labor market. This could support the Federal Reserve to continue its fight against inflation by raising interest rates at future meetings.
- In June 2023, the U.S. economy experienced a modest increase of 209K jobs, falling short of market expectations of 225K, and marking a decline from the downwardly revised 306K added in May. This represents the lowest increase since December 2020. However, the growth still exceeds the 70K-100K jobs required monthly to match the working-age population’s growth. The most significant employment boost came from the government sector (60K), particularly local government, which added 32K jobs.
Stocks
- U.S. equities were in negative territory. Healthcare and Materials led the decline, while Real Estate and Communication Services outperformed. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 23 basis points to 4.05% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
