The second quarter of 2023 gave investors plenty to think about—from mounting interest in AI to shifting inflation rates to the debt ceiling debate. Investors who remained focused on a diversified portfolio of equities and fixed income, benefitted from advances in both asset classes during Q2.
Shifting to a Bull Market
Stocks rebounded in 2023 after their worst year since 2008. The S&P 500 was up 15.8% through June 16, bouncing back from a two-year low in October 2022, signaling a shift from bear-market to bull-market mode after reaching a 20% gain from the prior low. Historically, US equity returns following sharp downturns have, on average, been positive. Stocks tend to continue to deliver positive returns even after the initial recovery from a bear market (decline of 20% or greater). The rally was led by technology stocks, whose surge coincided with increased attention on artificial intelligence and its potential. Value stocks and small caps started the year with gains, but growth stocks and large caps overtook them in the second quarter through mid-June. Global stock markets also bounced back. Global equities, as measured by the MSCI All Country World Index, rose 14.2% through mid-June.
The bond market has also rebounded in 2023 after one of its worst years in decades. US Treasuries rebounded after posting their worst annual return in decades last year. Despite rising bond prices generally, yields (which fall when prices rise) were higher than they have been for most of the past decade. More positive news impacting the markets—inflation showed signs of cooling and continued to retreat from last year’s four-decade high. After rising for 12 months, US consumer prices dropped to 4% in May. The Federal Reserve also paused on raising the benchmark federal funds rate in June after more than a year of increases. What does this mean for investors? Sticking to a sound investment plan with a diversified portfolio that is designed to achieve long-term goals can help investors see beyond short-term shifts in market activity.
AI vs. Aggregated Market Information
Investor enthusiasm for artificial intelligence has been cited among the key drivers for tech stocks’ recent gains. Much of the stock market’s gain can be attributed to just a handful of companies, led by NVIDIA, which saw strong chip sales as interest in AI built. But what does it mean for investing? At its core AI is an information aggregator. But is AI poised to become a predictor of overall market activity or the movements of an individual stock? The simple answer is no. AI has been around for a while and is expected to continue to improve. But remember, markets also aggregate information. They are forward-looking, something that AI is not. Markets reflect investors’ best estimate of an asset’s value in relation to future expected returns. This “aggregated intelligence” adjusts as new information comes in, setting prices that buyers and sellers agree are fair for millions of stocks and bonds every day. The takeaway here: the collective judgment of investors continues to provide the most accurate representation of the pricing of stocks and bonds.
Diversification & The Debt Ceiling
In Washington, politicians debated the US debt ceiling during Q2. Ultimately, the president and Congress agreed on a deal to raise the debt limit in June, avoiding the impending possibility of a US default. The current deal imposes restraints on government spending for two years. Amid the discussions, stock and bond markets seemed to take the news in stride. While debt ceiling debates can be nerve-racking, markets have already priced in the potential range of outcomes, reinforcing the message to stay the course with a long-term focus on investment planning.
What can investors do to stay focused when markets shift? Diversification remains one of the most important risk management tools available. A balanced asset allocation of global equity and fixed income investments combined with a long-term investment horizon are the best tools investors can use to help ride out shifts in the market.
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Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets. All information presented is collected from sources believed to be reliable, but may not be guaranteed. It is meant to provide general education and should not be considered investment advice, or a recommendation to take a particular course of action.