Having rallied in January on optimism that a recession would be avoided, the release of surprisingly strong labor market data forced the market to reappraise the trajectory of interest rates (dispelling any notion of them nudging lower later this year).This generated a cautious risk off tone that pushed the FT Wilshire 5000 -2.4% lower in February. However, the index is still up 4.4% YTD.
Exhibit 1: Risk aversion came to the fore in February driven by a rise in market interest rate forecasts
Source: Wilshire. Data as of February 28, 2023.
… the drawdown had a different dynamic compared to other recent pull backs. Here are 4 examples:
1 - Despite market weakness the technology sector leadership persisted
A key feature to the 2022 drawdown was the persistency of the decline in technology stocks. Interestingly, the February risk off move saw the technology sector outperform, delivering a positive sector weighted contribution to return (see Exhibit 2). In fact, year to date the technology and digital information and sectors have been the dominant positive contributions to aggregate returns. This is a mirror opposite to the 2022 dynamic.
Exhibit 2 : Sector weighted contributions to aggregate returns - YTD and February 2023
Source: Wilshire. Data as of February 28, 2023.
2 - The rotation to the Growth style (v Value) also persisted in February.
The positive inflection in the performance of the FT Wilshire Large Cap Growth index relative to Value that started in January persisted in February. This is a reversal of the 2022 dynamic (Exhibit 3). This rotation has occurred despite the rise in bond yields and real yields in February - these were key drags on highly valued Growth stocks in 2022.
Exhibit 3: Growth v Value style performance continues to inflect higher.
Source: Wilshire. Data as of February 28, 2023.
3 - A change in market dispersion dynamics in 2023 - the shift back to the dominance of the few.
Exhibit 4 compares the performance of the top 10 stocks in the FT Wilshire 5000 to the performance of the median stock to gauge the degree of performance dispersion. 2022 saw the median stock outperform the top 10 stocks implying a widening of dispersion. However, 2022 year-to-date has seen the opposite occur with the top 10 stocks significantly outperforming the median stock. This narrowing of dispersion has marked the return to the dominance of the few that characterized the market prior to 2022.
Exhibit 4: Comparing the return generated by the top 10 stocks v the median stock
Source: Wilshire. Data as of February 28, 2023.
4 - The 2023 YTD returns have been driven by a PE expansion - the opposite pattern to 2022
Exhibit 5 decomposes market returns drivers into the contribution from changes to dividends, changes to EPS forecasts and changes to valuation. In the case of the US market, over the last 12 months the negative return was mainly attributable to the significant decline in PE valuation (grey bar). In 2023 the opposite has occurred with the positive return been driven by the expansion in the PE multiple.
Exhibit 5: The decomposition of market returns - 12months and YTD
Source: Refinitiv. Data as of February 28, 2023.
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