In the first half of 2023, stocks and bonds produced positive returns[i]. Inflation has receded worldwide, and central banks have paused or slowed interest rate hikes. Since the beginning of the year, inflation has declined from 6.3% to 3.4% in Canada, from 6.5% to 4% in the US, from 10.4% to 7.1% in the European Union and from 9.2% to 7.9% in the UK. While this decline in inflation is welcome, we’re still way above the 2% target set by most developed economies’ central banks. Other news garnering attention was the failure of the Silicon Valley Bank, the debt ceiling negotiation between the US president and Congress, and the outperformance of artificial intelligence stocks.
On the interest rate front, the Bank of Canada rate has increased from 4.50% to 5.00%, and the US Federal Funds target rate increased from 4.50% to 5.25%. Ten-year government bond yields remained almost unchanged, decreasing slightly from 3.29% to 3.27% in Canada and from 3.87% to 3.84% in the US.
As of June 30th, Greece was the best-performing stock market (+41%), and Russia was the worst (-56%). The US and Canada ranked 13th and 20th among forty-one country markets tracked by research firm MSCI. Information technology was the best-performing global sector (+34%), and the energy sector was the worst (-4%). Interestingly, these two sectors had inverse positions in 2022: tech was the worst sector and energy the best. While much press was about the markets being driven by a handful of mega-stocks, 63% of Canadian and 58% of US stocks had positive returns during the semester.
Here are our observations on asset-class returns in the first half of 2023:
- US stocks returned 13.5% in Canadian dollars and 16.2% in US dollars.
- International developed market stocks returned 9.1% in Canadian dollars and 12.1% in local currencies.
- Emerging market equity returned 2.6% in Canadian dollars.
- Large-cap stocks outperformed small-cap in all developed markets and underperformed in emerging markets.
- Growth stocks outperformed value stocks in all developed markets and underperformed in emerging markets.
- The US dollar and other major currencies depreciated modestly against the Canadian dollar, which explains the lower CAD returns on US and international developed equity markets compared to local currency returns.
After a very difficult 2022 seeing both stocks and bonds produce negative returns in a high-inflation environment, the first half of 2023 witnessed positive returns and decelerating consumer prices. However, we can’t predict what the future holds for the rest of the year. While markets are unpredictable, a few observations inform our investment process.
First, global stocks produce positive returns in most years; thus, we invest a substantial portion of portfolios into this asset class. On a more sobering note, recovering from the occasional negative periods for stocks can be a long process. For example, a one-third decline in stock prices requires a 50% gain to recover their initial value fully. This highlights the role of bonds, which help reduce portfolio volatility. Finally, while the stock market tends to produce substantial long-term returns, most individual stocks do not even manage to outperform Treasury Bills[ii]. In addition, stock pickers notoriously struggle to beat the market[iii]. PWL responds to this challenge by diversifying portfolios, holding virtually every liquid stock available on global markets. Our priority is to capture the risk premiums available in the market while focusing on what we can control: managing risk, minimizing costs and taxes, and pursuing each client’s long-term plan.
[i] Sources: DFA, Bank of Canada, Statistics Canada, US Federal Reserve, US Bureau of Labor, Eurostat, UK Statistics. All return data is calculated in Canadian dollars unless mentioned otherwise.
[ii] Bessembinder, H., Chen, T., Choi, G., Wei, K. (2019). Do global stocks outperform US Treasury bills? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3415739
[iii] Di Gioia, D., Edwards, T., Ganti, A., Nelesen, J. (2023). Spiva® Canada year-end 2022. S&P Dow Jones Indices. https://www.spglobal.com/spdji/en/spiva/article/spiva-canada/