The reality of market performance doesn’t always match investor expectations, with 2023 no exception. In a new paper, Morningstar Indexes Strategist Dan Lefkovitz outlines a number of common investment assumptions overturned as the economy defied predictions of both hard and soft landing and interest rates promised to stay “higher for longer.”
Notable market surprises of 2023 include:
- Despite rising interest rates, which are perceived to be a drag on growth stocks, the Morningstar US Large-Mid Cap Broad Growth Index rose nearly 40% for the year through December 15, compared to a 13% gain for its value equivalent. Huge returns for the “Magnificent Seven” mega-cap growth stocks in 2023 have helped growth outperform after a dismal 2022 which was widely blamed on higher rates disproportionately hurting stocks with long-dated earnings.
- US small cap stocks, on the other hand, lagged versus the broad market in 2023 despite the common perception that small caps perform well in periods of economic growth and recovery. The Morningstar US Small Cap Extended Index is up 17% in 2023, nearly 8 percentage points behind the Morningstar US Market Index. Small caps also lagged in 2021, when the market and the economic rebounded from the pandemic downturn.
- Bonds, widely expected to move in the opposite direction as equities, gained ground in 2023, a year in the which the stock market was also positive. The 60/40 portfolio, as reflected by the Morningstar US Moderate Target Allocation Index, was up 15.5% through December 15. Positive correlations between stocks and bonds weren’t as painful as in 2022, when both major asset classes declined and the “death of diversification” was declared. Meanwhile, leveraged loans have been a major bright spot in 2023, with Morningstar LSTA US Leveraged Loan Index rising 12.6% year-to-date.
Dan Lefkovitz, Strategist, Morningstar Indexes, said: “Investors should be skeptical of conventional wisdom. Uncertainty surrounds the forces that move markets, how assets interact, and which investments best suit the macro environment. Rules of thumb about investing are hardly the immutable laws of physics.”
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