Broker Check

Important Considerations When Reviewing Relative YTD Performance

June 08, 2023

As we head into the halfway mark of the year, we thought it would be helpful to review several important performance factors that could prove useful in communications with clients. This year we have witnessed a significant and statistically unusual performance outlier. Let’s dig into the outlier and see how it is impacting performance.

The Stock market is off to a great start in 2023, up 9.68% through the end of May. The Artificial Intelligence craze has taken a hold as ChatGPT became a household name in 2023. This resulted in market returns being driven by a handful of mega-cap technology stocks over the last 5 months. Returns outside of the tech heavy NASDAQ Index (+31% ytd) have been lackluster to say the least. Mid-caps, small-caps, value stocks have all posted negative returns, while the Dow has only been able to edge out a minuscule gain. Therefore, if you own anything outside of technology, then your portfolio likely unfortunately temporarily suffered. The chart below highlights the stark year-to-date performance differentials of the growth heavy NASDAQ, vs the S&P 500, DOW, mid cap, small cap, and value indices. By several metrics, the out performance by tech vs the rest of the market is at the most extreme level we have seen this century.

The fact that tech stocks are the lone bright spot is critical when considering these mega-capitalization companies dominate the top spots within the S&P 500 index or other similar market cap weighted indices such as the Russell 3000 Index. Each percentage point gained in those stocks has an outsized impact on the index as a whole. As shown, each point gained by the top 10 companies in the S&P index has the same impact as that gained by the bottom 426 stocks combined. When you consider the enormous moves higher in the top 10 stocks (see performance chart below), the comparison relative to a benchmark can become temporarily skewed.  While we wish our clients only owned these ten stocks, we as students of investment history know that isn’t feasible or more important not prudent.  

The breadth of the market represents the number of stocks participating in a particular market's move as a percentage of the total number of stocks.  A rally on narrow breadth indicates limited participation, and the chances of failure are above average based on history. Typically, the market can’t continue to rally with just a few large-caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give the rally credibility. A rally that “lifts all boats” indicates far-reaching strength and increases the chances of further sustained gains. History tells us that there will likely be a reversion to a more typical relationship between market breadth and price performance. For example, keep in mind that on a 3-year basis S&P 500 equal weight is ahead of S&P 500 by 0.7% annualized. Also, S&P Growth is under performing S&P 500 by 1.9%. 

As we move into the second week of June, we have seen some broadening of market breadth (see below). Value stocks along with both mid and small caps are outperforming growth stocks. Furthermore, not only are tech stocks working, but now 8 of the 11 S&P sectors are now trading >20 day moving average trend-line suggesting a possible trend higher. We will have to wait and see if the trend continues. However, using history as our guide, one sector can’t dominate forever. This, along with many other reasons, is why we believe a properly diversified investment portfolio should win out in the long run.

If you have any questions, please reach out to your financial advisor.

Have a great summer.

Brett R. Jergens CFA®, CFP®

Chief Investment Officer

Investment Advisor Representative

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.