Markets
It’s been well over a year since stock and bond markets took a tumble. Though stocks are well off their lows, some broad market indices have yet to fully recover. Bonds, meanwhile, have remained fairly stagnant. If you're a balanced investor with a stock and bond portfolio, it may feel like your portfolio has been in limbo. And unless you are heavily invested in technology stocks or got in on a hot artificial intelligence-related stock, it’s hard to watch your investments remain in stasis or lose value.
But know that you’re not alone. There isn’t a magic stock or asset mix that you’re missing out on. Many investors are in the same situation.
In 2022,1 the S&P 500 and the Nasdaq fell by 19% and 33%, respectively, on the back of elevated, sticky inflation and aggressive interest rate hikes from the Federal Reserve. And since 1976,2 investors have never seen a three-year rolling period in which stocks and bonds lost money. The average 60% stock / 40% bond portfolio declined about 16% in 2022.3
So far in 2023, investors have witnessed a significant difference in returns largely dependent on the geographical or sector allocation decisions within portfolios. For example, the US-focused Nasdaq and S&P indices have been among performance leaders and largely driven by a renewed interest in the technology sector, which was out of favour in 2022. Additionally, developed markets in Europe as measured through the MSCI Europe Index have also shown reasonable performance as early fears of significant inflationary pressure due to energy supply concerns in Europe failed to materialize. Alternatively, the TSX Composite Index and its heavy energy weight has underperformed so far in 2023 after an outstanding year in 2022.
The chart below represents the annual performance of various global indices and highlights the difference in annual performance. Here’s a snapshot of each index’s industries, theme or geographic area.
- S&P 500: Widely regarded as the best gauge of US large-cap equities, which are companies with a market capitalization value of more than US$12.7 billion.
- Nasdaq: Tech focused and heavily weighted to a few mega cap names.
- TSX Composite: Heavily focused on energy and financials; less diversification when compared to the S&P 500.
- MSCI EAFE: Covers Europe, Australasia, Israel and the Far East, and is one of the broadest geographical indices.
- Russell 2000: US small-cap index covering companies with market capitalization from $250 million to $2 billion.
- FTSE 100: Covers the largest companies on the London Stock Exchange.
- MSCI Emerging Markets (EM): Covers 24 EM countries such as Brazil, China and Mexico.
- MSCI Euro Index: Measures developed markets in Europe.
Index performance from 2012 to 2023
Source: Bloomberg
The annual performance of eight different indices over 11 years shows the variance between and within indexes year over year.
It’s clear from this chart that while there are varying sector themes, there is no single index consistently outperforming the rest over time. Market cycles vary across geographies and sectors, and even professionals who study the market full time have difficulty predicting performance.
“The most sound defense against market volatility is portfolio diversification,” says Jared Kadziolka, a senior portfolio analyst with ATB Wealth. “We’re always going to see fluctuations in all sectors and geographies, but we don’t know exactly when. You can limit your risk and improve returns by ensuring your portfolio includes a broad mix of assets.”
"We’re always going to see fluctuations in all sectors and geographies, but we don’t know exactly when. You can limit your risk and improve returns by ensuring your portfolio includes a broad mix of assets."
Jared Kadziolka
Senior Portfolio Analyst, ATB Wealth
Active portfolio managers have been sharpening their pencils in 2023 as a wide range of returns in various indices could have a significant impact on returns. The difference in year-to-date returns for major North American indices such as the Nasdaq (31%), S&P 500 (14%), TSX (2%) and Dow Jones (3%) illustrates the significant variance of sector and geographic exposures within these indices.
Another good example of this is the significant outperformance of the TSX Composite Index in 2022 compared to its peers, due to a rally in oil prices that provided a cash windfall to many western Canadian producers. Alternatively, the Nasdaq significantly underperformed in 2022 as investors sold longer duration equities in favour of those generating near-term cash flow. In 2023, the markets have renewed interest in big tech names as the Nasdaq is among global leaders in index performance. While this is great news for those with exposure to the index, it is important to note that the Nasdaq outperformance has been largely driven by six names—Apple, Microsoft, Amazon, Tesla, Google and Nvidia, who collectively represent 39% of the index, as of March 31, 2023.
2023 performance of Nasdaq mega cap top performers versus TSX
Source: Bloomberg
Apple, Microsoft, Nvidia, Tesla and Google have helped drive the Nasdaq higher than other indices so far in 2003.
So is it too late to get in on Nasdaq’s upward momentum and AI stocks like Nvidia?
“You’ll definitely be paying a premium now,” says Kadziolka. “And you never know if or when that momentum will pause or reverse, as other trendy stocks like Tesla have shown. There’s nothing wrong with swinging big, but know what you’re getting into and make sure you have a well diversified portfolio to fall back on.”
Source: How to Recover After a Loss in the Stock Market, Tony Dong. U.S. News
Source: Why ordinary investors got hit so hard in 2022, Myles Udland. Yahoo News
Source: The improved outlook for the 60/40 portfolio. Vanguard.
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