Investment Review for Second Quarter 2023

Risky asset returns.

Stocks continued to gain in the second quarter, bringing returns for global stock into double-digit territory with a 13.9% return for the broad index in the first half of 2023.  Large U.S. companies, represented by the S&P 500 index, were the best performers up 16.9% in the first half, followed by foreign developed stocks gaining 11.7%.  However, outsized returns for U.S. stocks were not necessarily shared across the marketplace as U.S. mid and small company returns were much less impressive.  In addition, when looking at the average return for individual companies in the S&P 500 index, returns were a more modest 7.0%.    

Big companies drive returns. 

When digging a little deeper into the S&P 500 index, which weighs its underlying holdings based on market value, many will be surprised to learn that a very small number of companies were able to overshadow hundreds of others in the first half of the year.  While the S&P 500 index is comprised of 500 companies, seven companies have driven the majority of returns for the entire index.  Specifically, I am referring to Apple, Microsoft, Google, Amazon, NVIDIA, Tesla, and Facebook. The largest of those seven, Apple, alone has a larger weight in the index than the smallest 200 companies combined.  

When it comes to driving returns, the seven largest holdings contributed 12.2% to the index’s return, while the other 493 companies only contributed an additional 4.7%.  As mentioned earlier, if all 500 companies were equally weighted, the 16.9% return for the S&P 500 would have been reduced to 7.0%.    

Top 10 influence increases.

Given the fact that the S&P 500 is market cap weighted–meaning larger valued companies have a larger representation than smaller valued companies–it is no surprise that the top 10 holdings have historically had a large representation in the index.  Over the past 30 years, on average, the top 10 holdings have represented about 20% of the index.  Today, however, that number now exceeds 30%.  That’s right, at quarter end the top 10 constituents of the S&P 500 represented more than 30% of the index.  As such, owners of S&P 500 index funds may not be as diversified as they believe, and future returns for those investors will likely be highly dependent on just a handful of companies.  

Inflation easing.

Inflationary pressures appear to be easing a bit.  In the most recent release of the Consumer Price Index, prices were only up 3.0% for the trailing 12-month period.  This is a stark contrast from the 9.1% figure we witnessed one year ago when June 2022 data was released. When we dig a bit deeper into various categories, we can see that the two largest categories, food and shelter, continue to show elevated levels of inflation (up 7.8% and 5.7% respectively).  In contrast, energy prices have fallen 16.7% over the past 12 months.  Hopefully, inflation will continue to dissipate in the months to come to provide consumers additional relief.

Debt to continue piling up. 

On June 3, President Biden signed into law the Fiscal Responsibility Act of 2023 which suspends the limit on federal debt (also known as the debt ceiling) through January 1, 2025.  The law also made several changes that will affect federal spending and revenues.

A few key budgetary provisions include:

•    Imposing caps on most discretionary funding for 2024 and 2025
•    Rescinding certain unobligated funds provided in response to the coronavirus pandemic
•    Modifying work requirements for recipients of SNAP benefits (formerly known as the Food Stamp          Program) and Temporary Assistance for Needy Families
•    Rescinding certain funds provided to the Internal Revenue Service

The name of this law, however, seems a bit misleading to many.  While the Congressional Budget Office does estimate that the act would reduce spending by approximately $1.5 trillion over the next 10 years, they also estimate that spending would still outpace receipts by a whopping $18.8 trillion during that period.  This would bring the U.S. government’s total outstanding public debt to over $50 trillion by the end of 2033.