March 5, 2023

2023: Taking Stock

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Bottom Line:


With 17% of 2023 now in the books, it’s time to take stock. Overall, markets have advanced briskly this year, despite the recent pullback. 2023’s 3% advance for the S&P 500 may not sound robust, but that’s 18% when annualized. While compelling, the numbers get even more compelling beyond the S&P 500 with the Pure Value style up 4.8%, offshore shares up 5.2%, and small caps up 8.2%, annualizing up to 28.8%, 31.2%, and 49.2%, respectively. It’s statistically irrelevant to annualize these numbers, and far from predictive, but the magnitude of comparison matters. Small caps, the value style, and international shares continue to outperform due to their significant valuation discounts to the S&P 500. With this trend proven in 2022’s falling market and in 2023’s rising market, investors should continue their equity quests beyond the S&P.


The Full Story:


Pessimism continues to replenish after hotter-than-expected inflation reports accompany hotter-than-expected economic reports. After a fierce run-up from the October lows, the major stock indices sit right at major technical levels (50-day moving average, 200-day moving average) awaiting directional conviction. Preventing further advances, the entire interest rate complex has risen, as has the US dollar. Higher rates weigh on valuation mathematics, and a higher U.S. dollar weighs on earnings and sentiment mathematics. Fortunately, the run we had over the first six weeks of the year gave us plenty of room for retrenchment. Even with the sudden rise on the 10-year Treasury back above 4%…


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…equity markets remain broadly higher on the year. And while 3% on the S&P 500 may not sound like much, when you annualize that number after only two months, it’s 19%. Outside of the S&P 500, returns rise even higher. Now that we have completed 17% of 2023, let’s do a quick survey to take stock of what’s working so far.


Smaller is Bigger


So far in 2023, the smaller companies have risen more than large companies…




…with the S&P 600 Small Cap index returning 8.2%, the S&P 400 Mid Cap index returning 7.5%, and the S&P 500 Large Cap Index returning 3.22%. We attribute this to a valuation reversion to the mean, which could persist for quite a while. The largest stocks in the S&P 500 became wildly over-owned and over-valued, with the five largest companies in the S&P 500 comprising 26% of the entire index value prior to 2022’s drop:




Today, they comprise about 21% of the S&P 500’s index value, well off their 2022 lows, but also well above the Top 5 weight prior to the dot-com reversion. When you compare P/E ratios, the S&P Small Cap index trades at 13.7x earnings; the S&P Mid Cap index trades at 14.2x earnings; the S&P 500 Large Cap index trades at 17.5x earnings, while the Mega-8 (Apple, Amazon, Google, Facebook, Microsoft, Netflix, Nvidia, Tesla) trade for 25.5x earnings. The outsized share of these few companies within the S&P 500 index primarily directs performance. If we compare valuations of the Small Cap index with these mega cap heavyweights, it trades for a 45% discount. This wide valuation disparity invites convergence, presenting small cap investors with ample scope for continued outperformance.


Value Stylin’


In 2022, the Value investment style, with its lower valuation attributes, dramatically outperformed the Growth style. In 2023, reweighting the factor indices has led to some confusion. In fact, mega caps like Google, Amazon, Facebook, and Microsoft now reside in both the growth and value factor indices after their sizable declines. This explains the near identical returns of the Value investment style and the Growth investment style year to date:




Another way to slice the data is to isolate the returns for the growth-iest of the growth and the value-iest of the value stocks. S&P provides these indices as well, calling them the Pure Style indices. The returns for the Pure Style indices year to date paint a much clearer picture with the S&P 500 Pure Value index up 4.8% versus the S&P 500 Pure Growth index up 1.1%. This divergence grows far larger down the cap spectrum, with the small cap S&P 600 Pure Value index up 13.6% and the small cap S&P 600 Pure Growth index up 5.8%. For 2023 so far, the value style continues to hold the advantage.


Offshore Returns


Last year, despite a strong run in the US dollar, war in Europe, and China COVID closures, international shares outperformed US shares by around 2%. Much of this can be attributed to the same “valuation return to the mean” that lifted small cap and international shares. In 2023, the dollar is flat, war still rages in Europe, and China’s economy has reopened. The valuation spread offshore remains compelling at 12.7x vs. 17.5x onshore. Therefore, the story for internationals has marginally improved, as have the returns:




The recent uplift in the US economy, interest rates, and the US dollar have lessened early-year outperformance, but any reversal in these factors will reignite return boosters offshore.


In sum, 2023 differs from 2022 in that it has produced gains. What hasn’t changed is the performance advantage for small caps, the value style, and offshore shares over US large cap stocks burdened by lofty valuations. This market continues to reward lower valuation market segments, which is why we continue to overweight them.


Extra Credit Chart 1: US Size and Style Performance:




Extra Credit Chart 2: USA vs. Ex. USA Valuations:



Enjoy your Sunday!


David S. Waddell  

CEO, Chief Investment Strategist




Sources:  FactSet,, Standard and Poor’s, FRED


David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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