Telemus Weekly Market Review February 20th - February 24th, 2023
Back on February 2nd, Punxsutawney Phil saw his shadow and retreated into his burrow, signaling another six weeks of winter. This past week we were reminded of Phil’s decision as winter weather struck with a vengeance. Interestingly enough, the groundhog wasn’t the only thing that retreated on February 2nd, as stocks prices have also been recoiling since then. The broad-based S&P 500, which experienced a rather steady climb throughout January, peaked on February 2nd with a year-to-date gain of just under 9%. Since then, share prices have fallen by just over 5%. Over half of the deceleration came in the past week when the S&P 500 retraced -2.7%.
What has led the market year-to-date are growth sectors such as consumer discretionary, technology and communication services. These happened to be among the worst performing sectors in 2022. A key reason for these sectors leading the way has been the heavy short covering among hedge funds. Short positions are trades made where one bets on stock prices falling. By one account¹, hedge funds have been so active in buying stocks to cover their shorts it marks the second largest short covering in the past decade. The so-called January effect is another potential reason for the strong returns of 2022’s laggards. The January effect results from investors selling their losing positions late in a calendar year to recognize the loss for tax reasons. Then early in the new year they buy those stocks back, thus leading to strong upward pressure on their share prices.
Collectively these factors provide some explanation for what has been an unusual start to 2023. When we dissect what has worked in 2023 it’s been stocks that typically have more volatile price movements and have less consistent financial results. We often coin these stocks ‘low quality’ companies. With the economy teetering on a recession and the Federal Reserve remaining active in its rate hiking campaign, our expectation was more consist higher quality stocks would stand out. We still expect this, although the technical factors discussed above have led to a different cohort of stocks leading the way at the start of the year.
Another influence on stocks has been a resurgence in trading activity among individual investors. So called retail traders have accounted for nearly a third of total equity trading volume during 2023. Throughout the meme stock crazes of 2021, retail trading activity had been at similar levels, but dipped toward 20% of total activity during 2022. The reemergence of individual investors has benefited many of their old favorites such as Tesla, Meta, Nvida, Netflix, Apple and Amazon. All of these stocks are up double digits on the year. Tesla stands out as it is up 60% thus far in 2023, after having fallen -65% in 2022.
As we entered 2023, we projected that market volatility would remain and that there would be episodes of excitement as well as concern. The range of emotions this early in the year has certainly added volatility to the market. We didn’t believe the euphoric sentiment around a soft landing was justified, nor do we believe the current concerns around a resurgence in inflation are either. We continue to believe there will be noise in short-term datapoints and one must invest with a larger panoramic perspective.
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