Investment Commentary: Q2 2023

By George T. Padula, CFA, CFP®

Co-Chief Investment Officer, Wealth Manager & Principal

July 14, 2023

Welcome to summer when, as the saying goes, “the livin’ is easy.” But it seems as though investing and the economy have been anything but easy for a very long time.

The last five-plus years have been a pickleball match of investing. It’s been back-and-forth, back- and-forth and a LOT of noise in between: deflation; inflation; rates rising and falling; monetary and fiscal expansion, now tightening; unemployment skyrocketing, now falling like a rock; too few jobs, too many jobs. It is hard to focus on the long-term when the short-term is so unnerving. Any number of issues could have derailed investors this year. The banking crisis in March seems so long ago. Remember those worries about the debt ceiling from just a few weeks ago? Me neither. Higher mortgage rates expected to shut down housing? Not so much.

There is so much we could write about, but I thought we could focus on recent returns and valuations, look at some longer-term returns and conclude with some pearls of wisdom from a pioneer of portfolio theory, Harry Markowitz.

Recent returns:

(see charts below1)

  • The S&P 500 gained nearly 9% in Q2 and is up 17% YTD.
  • Nasdaq has gained 32% YTD.
  • The U.S. aggregate bond index is up 2% YTD.
  • International equities are doing well, with developed markets +12% and emerging markets +4.9%. Growth led the way while value sectors trailed.
  • Among large cap industries, homebuilders, surprisingly, led in Q2 up 19%, while regional banks, perhaps not surprisingly, declined the most, down 6% in Q2.
  • Inflation readings have come down substantially from earlier in the year.
  • The Federal Reserve’s primary inflation measure, the personal consumption expenditures price index, rose 3.8% over last year, the lowest over the last two years.
  • Per Commerce Department data, household spending is flat overall vs. last year. When consumers have spent, it seems to be more on services such as health care and travel and less on goods and products like automobiles and furniture.

Other 2023 storylines:

Consumers have been resilient, wages and job growth have been steady, and inflation is slowing. As measured by year-over-year Consumer Price Index (CPI), inflation continues to move lower, with May coming in at 4.05% vs. the peak in 2022 of 9.06%.2

At their June meeting, the Federal Reserve (Fed) decided to leave rates unchanged for now. Chairman Powell noted that maintaining the current target range would allow more time to assess data that’s still being affected by all of their prior rate increases. The door is open for more rate hike(s) later this year. Many will debate the merits of additional hikes but, as the saying goes, “Don’t fight the Fed.”

The U.S. economy – which was sustained with the pandemic reopening, monetary and fiscal stimulus, and the tightest labor market most of us have seen in our lifetimes – needs to (and is) slow from its sprinter’s pace.

New technologies, over the course of time, have led to remarkable improvements in the standard of living. Artificial Intelligence will be no different. The iPhone came into being only 16 years ago. Imagine where we will be in another 16 years.

What is going on with the S&P500? Why am I not keeping up? Aren’t we in a bull market?

It may be a bull market for a few companies, but not for a lot. Stock market gains seem to be relatively narrow and concentrated.

The S&P 500 is not a great index to use to gauge whether the “market” is doing well. The S&P 500 is neither particularly diversified nor broad in its weighting. It is top heavy in just a few companies in a few sectors. The top 10 companies in the S&P 500 are 32% of the index, and the info tech, healthcare and financial sectors represent 53% of the index. If all you did was hold the S&P 500, you essentially would be eliminating a vast swath of the investable universe. Last year, those big companies and sectors were hit hard.

Even though the fundamentals of today’s tech mega cap companies are stronger than they were in the tech bubble, their earnings contribution hasn’t moved much. As a result, much of the recent price appreciation in the mega cap names and the S&P 500 has been driven primarily by Price/Earnings (P/E) expansion. Per JP Morgan data, the top 10 stocks have an average P/E of 29.3x compared to the other ~490’s average P/E at 17.8x.3

Valuation matters:

With equity gains so concentrated in a few mega cap and tech companies, one has to wonder if valuations are getting a bit higher than they should.

Per data from Avantis4, the current U.S. large cap growth stocks P/E ratio is 28X vs. the P/E for small value stocks at 9.5X, or 3X higher. By comparison, the average P/E ratio from 2000-2022 is about 24X and 15X respectively, or a premium of only 1.5X. Valuation always matters (data based on Russell 1000 Growth index vs. Russell 1000 Value index).

Sticking with the valuation theme, P/E ratios for international equities seem to be in the 13X-11X range, for developed and emerging markets respectively (MSCI ACWexUS IMI and MSCI EM Mkts IMI Index per Avantis 5/31/23). Further, the U.S. dollar has come down after rising much of 2021 and 2022. The exchange rates typically bode well for international equities.

For all the talk of how great the mega caps are doing thus far in 2023, take a look at what they were doing at this time last year. Note that the small caps and value indexes were strong relative performers in 2022.

Source:  Index key: R1K = Russell 1000; R2K = Russell 2000. Please see disclosures.


Longer-term returns:

Due to this capitalization weighting effect, the largest companies have an outsized impact on returns. It’s those companies that are driving returns right now. They were also the ones that led indexes down in 2022.

For the last three years ending June 30, 2023, small value has been leading the way; even leading the NASDAQ by 3.5% per year.


Source: Index key: R1K = Russell 1000; R2K = Russell 2000. Please see disclosures.


That classic question: Is it different this time? Of course it is. It always is. But the fundamentals of investing remain. While any of these factors could still derail investors, none are a reason to abandon the fundamentals of why and how we invest.

Don’t abandon the fundamentals of investing and equate short-term cash yields with an investment strategy designed for the long-term. This has been an unusual time. When interest rates have climbed so quickly to provide seemingly comparable returns to bonds and equities, investor behavior suggests that some have acted on this uncertainty in anxiety rather than maintaining the discipline of a well-formed and well-thought-out financial planning strategy. As you can see from the returns this year, over the last three years and longer, having a diversified, global approach that includes some safe, short-term, cash-type investments as part of your overall net worth has won out in the long run.

Wisdom of Nobel Laureate Harry Markowitz:

I would be remiss if I did not mention the recent passing of Nobel Laurate Harry Markowitz, who died at the age of 95. Markowitz was one of the first to link investment returns and risks into a concept of overall portfolio risk: Modern Portfolio Theory. His contributions to investing and economic theory cannot be overstated. Markowitz coined the efficient frontier, both in theory and in implementation, showing that when many risky assets are combined, overall portfolio risk can be reduced.

In other words, the whole is greater than the sum of its parts.

We’ll finish with two quotes attributed to him:

“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”

“Perhaps the most important job of a financial advisor is to get their clients in the right place on the efficient frontier in their portfolios. But their No. 2 job, a very close second, is to create portfolios that their clients are comfortable with. Advisors can create the best portfolios in the world, but they won’t really matter if the clients don’t stay in them.”

With all of the ups and downs and the information that’s out there, it is all about focusing on long-term growth, being diversified, and having the discipline to stick with the strategies to meet your financial goals.

1 Source: Above data and Asset Class and Equity Style Summary charts: Please see disclosures.
4 Source: Monthly ETF Field Guide, May 2023,

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