Why Stock Market Returns Are Strong Despite Investor Concerns
Why Stock Market Returns Are Strong Despite Investor Concerns
June 5, 2023
Audrey Keel | Marketing Manager
Investors have grappled with market and economic challenges this year ranging from Fed uncertainty, stubbornly high inflation, the possibility of a recession, a banking crisis, the debt ceiling, ongoing geopolitical tensions, and more. And yet, the stock market has made significant year-to-date gains with the S&P 500 returning 12.4% with dividends and the Nasdaq 27%. This is further evidence that markets often defy expectations and can rebound when it's least expected, especially when investors are overly focused on short-term events. What factors are driving these returns and how can investors focus instead on long-run trends?
Investor sentiment tends to swing from one extreme to the other. At the start of the year, many investors and economists were certain there would be a recession within months that would result in higher unemployment and Fed rate cuts. As we approach the second half of the year, no recession has yet materialized, and many economic trends have surprised to the upside. Headline inflation measures have improved although core inflation remains stubborn. Interest rates have stabilized with the 10-year Treasury yield hovering around 3.7%, partly due to a possible Fed pause at an upcoming meeting. These factors have helped tech stocks rebound, especially in areas related to artificial intelligence. This has driven a divergence between sectors this year with Information Technology and Communication Services returning 36% and 34%, respectively, and Energy, the top performer last year, declining 9%.
Markets have made considerable gains over the past few years
Despite the strong market gains this year, it's unlikely that investors feel comfortable in the current environment. There is always something new to worry about, a concept often referred to as the "wall of worry." The wall never shrinks - new building blocks are continually added as investor focus and media coverage shift to the next set of worries.
A focus on day-to-day headlines naturally leads investors to have a glass-half-empty view. After all, current events tend to dwell on unexpected negative events, rather than on the steadier, less noticeable progress that drives stock market returns over years and decades. Today, this short-termism reminds investors that major indices are still in the red when compared to last year's all-time highs, and that many thorny market and economic issues are still unresolved.
This is why it's often important to view the market with a broader perspective. The glass-half-full view, which is much more appropriate for long-term investors, is that many of these issues are slowly improving. As a result, the market has risen 21% from last year's market bottom, and 71% since the beginning of 2019, despite all of the intervening events. These are figures that everyday investors would likely be unaware of if they only followed the day-to-day headlines.
The economy continues to grow despite recession fears