US stock prices declined between the second and third quarter of 2023. Year-to-date returns remained strong—the S&P 500 Index returned +13.1%—as stocks held onto the majority of gains achieved earlier in the year. Similarly, bond prices declined as intermediate and longer-term Treasury yields rose. The US 10-year Treasury yield increased to 4.59% from 3.81% in the third quarter as US economic growth proved stronger than expected. Large budget deficits and concerns over the increased Treasury bond issuance to finance those deficits may also be pressuring yields.
Stocks continued on an upward path in the second quarter. Over the first six months of 2023, the Standard & Poor’s 500 Index returned +16.9% while the Dow 30 Industrials Index returned +4.9%. For much of 2023, performance has been driven by a handful of large technology stocks, most of which benefited from enthusiastic interest in artificial intelligence. The S&P 500 Index is capitalization-weighted where the largest companies have a much greater impact on the performance of the index. The equal-weighted S&P 500 Index returned +7.0% in the first six months of the year.
After rising nearly 9% in the first five weeks of 2023, markets gave back most of their gains by early March then staged a recovery into quarter end. The S&P 500 Index returned 7.5% over the first three months of the year while the Dow Jones Industrials returned 0.9%. Unexpected problems at several regional banks developed late in the quarter, creating fears of a wider crisis. Emergency support measures by the federal government have so far restored confidence in the banking system. With inflation still too high, the US Federal Reserve continued raising short-term interest rates. Longer dated Treasury yields declined on renewed concerns of a recession.
Strong pessimism at the end of September set the stage for a rebound in equity prices in October and November before the markets faded in December. For the fourth quarter, the Standard & Poor’s 500 Index returned +7.6% while the higher-quality Dow Jones Industrials surged +16.0%. For the year, the two indexes returned –18.1% and –6.9%, respectively. As seen in the Market Indicators box to the right, other domestic and international indices produced negative total returns ranging from –20.7% to –13.1% last year. The technology-heavy NASDAQ index returned –32.5% in 2022.
The Standard & Poor’s 500 Index continued its 2022 downtrend, returning –4.9% in the third quarter. The index has returned –23.9% year-to-date and ended the third quarter below its June lows, even after a sizable summer surge. Thus far in 2022, the market has had three trough-to-peak rallies in the 5%-10% range and two in the 11%-20% range. Such rallies are typical of bear markets and reflect ongoing uncertainty and the push-pull of investor reactions to new economic, geopolitical, and fundamental developments.
Stocks fell at a faster clip in the second quarter as inflation continued its upward march and the Federal Reserve reacted by further increasing interest rates. The Standard & Poor’s 500 Index returned a negative 16.1% in the quarter. The technology-heavy NASDAQ Composite returned a negative 22.3%. The higher quality Dow Jones Industrial Average held up better, returning a negative 10.8%. Many international markets outperformed US markets due to their heavy weighting in financials and low weighting in technology.
Most major US stock market indices ended the first quarter below the peaks achieved at the beginning of 2022. Concerns about high valuations and higher interest rates drove declines in late January. In February, markets fell more following Russia’s invasion of Ukraine. After bottoming in early March, markets recouped a large part of their losses despite continued high uncertainty. Through March 31, the S&P 500 Index returned –4.6% after being down nearly 13% at its worst. The most speculative, high-priced growth stocks declined the most over the first three months of the year. The Nasdaq Composite, which is weighted toward growthier technology stocks, returned -8.9% after being down close to 21% at its lows.
The Standard & Poor’s 500 Index had another strong year, returning +28.7%. The higher quality Dow Jones Industrial Average returned +21.0%. Mid- and small-capitalization equities were not far behind (see market indicators table to the right). International equities underperformed US equities. The MSCI EAFE Index of developed country stocks returned +11.5%. Dragged down by weakness in Chinese equities, the MSCI Emerging Markets Index returned –3.6%.
Stock prices continued moving steadily up in July and August before faltering in September amid growing predictions of a correction. During 2021’s first nine months, the Standard & Poor’s 500 Index continued leading other indexes with a return of 15.9%. The higher-quality Dow Jones Industrials Index returned 12.1%. In general, riskier, “higher beta” stocks performed best. With the notable exception of Chinese stocks, most other non-US equity indexes also produced attractive returns. Chinese stocks suffered as new central government regulations limited some business activities and highly leveraged Evergrande, China’s second-largest real estate developer, teetered on the brink of financial collapse.
US equity markets continued higher in the second quarter with several key indexes setting new highs in late June. The Standard & Poor’s 500 Index returned +8.6% during the quarter to bring the year-to-date return to +15.2%. Most other indexes produced more modest returns during the three-month period as investors seemed to rotate between sectors in search of undervalued companies. For example, small-capitalization stocks only returned +4.3% and a popular China index returned –0.4% during the quarter.
The stock market’s upward trajectory moderated as the Standard & Poor’s 500 Index returned +6.2% during 2021’s first quarter. Many of the large technology company stocks that led the market’s 2020 rebound sat out the first quarter of 2021. Stocks from the previously underperforming sectors of energy and financials shined. As the Market Indicators chart to the right shows, mid-capitalization and small company stocks had a particularly good quarter. The 12-month performance for all equity indexes is impressive. However, those gains include recovering from the market plunge that preceded the period’s start.
US stocks continued to move higher during 2020’s last quarter, with the S&P 500 Index and the Dow Jones Industrials returning 12% and 11%, respectively. Small and mid-capitalization stocks were even stronger, returning 31% and 24% during the quarter. All equity indexes produced attractive returns in 2020 (see Market Indicators box). However, those annual returns conceal the story of a rapid, deep bear market and the subsequent 68% S&P 500 rebound.
Six Decisions Before Seventy-Five
Research shows that major, complex decisions in later parts of life are particularly difficult. Often the approach is to simply delay until a crisis point. To avoid unnecessary stress on yourself or on loved ones, it makes more sense to prepare for major decisions before a crisis. We suggest there are six major questions that should be addressed before reaching age 75.
In the course of our careers we have had numerous conversations with clients and their children about the advisability of a prenuptial (also known as premarital or ante nuptial) agreement. Often these conversations were after an engagement was announced and a wedding date set, and the client or child of the client was unaware of the concept of such an agreement and found the conversation uncomfortable.
Paying for College
The annual cost of attending many private colleges now approaches or exceeds $60,000. While this cost will be reduced for many families through needs-based scholarships and tuition discounts, families with accumulated financial assets will spend close to the full amount. Here are six basic approaches to saving and paying for college.
Avoiding Inheritance Mistakes
A substantial inheritance can have a life changing financial impact: if handled wisely, the elusive goals of financial security and a comfortable future retirement may become attainable. But sudden wealth can sometimes be overwhelming and, if not guarded carefully, can easily be eroded or destroyed. Avoiding the following common mistakes is key to your future financial wellbeing after receiving a substantial inheritance.