The Rest of the Story, part 2

Back in July of 2020, we wrote a blog about the narrowness of the nascent market recovery from the COVID drop.  We referenced the late Paul Harvey (and my dad and his awesome 1970s walnut box speakers…) and Mr. Harvey’s dramatic catchphrase: “Now you know…the rest of the story”…

And weirdly, nearly three years later, investors are facing the same circumstances again!

At face value, the stock market has had an amazing first half.

But as in July 2020, the market growth is concentrated in the top seven names.  Per Bespoke Research: “Through June 29th, only 30 stocks in the S&P had accounted for more than 95% of the S&P 500’s gain this year…Apple accounts for roughly 18% of the S&P’s total first half move, while Microsoft is at 14.4% and NVIDIA is at 13%. Including Amazon (AMZN), Tesla (TSLA), Meta (META), and Alphabet as well, this group of seven mega-caps have accounted for roughly three quarters of the S&P’s gain.”  The other 493 stocks are barely positive to hugely negative.  In fact, if you exclude the technology and communication services sectors, the S&P 500 is actually just up 1.4% this year.

The tech effect can be seen in the different styles of the S&P 500—as this chart from S&P Global shows, any investing style that had high concentrations to technology or communications services companies did extremely well.  Any styles that were defensive or quality driven, that focused on value, dividend, or low volatility stocks have lagged:


Given that much of the dramatic rally in the big tech names was not based on their revenue growth or margin expansion, but rather excitement over the future potential of Artificial Intelligence, the hyper growth seems slightly extended, and we look forward to seeing the gap between the high growth names and the smaller value stocks narrow as a sign of sustainable economic growth.

(The current performance gap between Large Growth stocks and…everything else…)

Moving over to the bond market, there is more to the story there too…

The headline news is that Treasury Bonds are paying over 5%.  The current yield on a 1 year US Treasury is almost 5.5%!

Source: FactSet, Federal Reserve, J.P. Morgan Asset Management.
Guide to the Markets – U.S. Data are as of June 30, 2023.


While that is very exciting news to all investors (FINALLY, a “risk-free” rate above 5%!!!), the rest of the story is the other side of the rate hike cycle…

As Nathan wrote about here, bond prices fall when interest rates rise.  So, we’ve lived through the left hand side of the chart below (the gray bars).  Last year, bond prices dropped 13% in response to the Federal Reserve raising interest rates from .25% to 4.75% in 9 months.

Source: Bloomberg, FactSet, Standard & Poor’s, U.S. Treasury, J.P. Morgan Asset Management. Sectors shown above are provided by Bloomberg unless otherwise noted and are represented by – U.S. Aggregate; MBS: U.S. Aggregate Securitized – MBS; ABS: J.P. Morgan ABS Index; Corporates: U.S. Corporates; Municipals: Muni Bond; High Yield: Corporate High Yield; Leveraged Loans: J.P. Morgan Leveraged Loan Index; 10-Year TIPS: Bloomberg 10-Year TIPS On-The-Run Index; Convertibles: U.S. Convertibles Composite. Convertibles yield is as of most recent month-end and is based on U.S. portion of Bloomberg Global Convertibles Index. Yield and return information based on bellwethers for Treasury securities. Sector yields reflect yield-to-worst. Convertibles yield is based on U.S. portion of Bloomberg Global Convertibles. Correlations are based on 15-years of monthly returns for all sectors unless stated otherwise. Past performance is not indicative of future results. *10-Year TIPS yields and calculations are based on on-the-run real yields. 10-Year TIPS correlations are based on monthly returns since 2011 due to data availability. Guide to the Markets – U.S. Data are as of June 30, 2023.

When interest rates begin to fall—which by the Federal Reserve’s own projections below, is estimated to be late 2023 to 2024, bond investors will benefit from increasing bond prices (the blue lines in the chart above).


At Meridian, we are very thankful for a nice first half in both the stock and bond markets.  And one more ‘rest of the story’…since that blog was written back in July 2020, the stock market rally that started in the top tech stocks did widen and extend through all asset classes.  Since that blog, the S&P 500 has returned over 35% cumulatively:

So, we know past performance is not indicative of future results…and history doesn’t repeat itself, but we sure hope it rhymes this time!


Milo praying the second half of 2023 is as good as the first half…

Categories : Financial Planning

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