August 30, 2023

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. — Warren Buffett

It was a good quarter for U.S. stocks; the S&P 1500 index of large-, mid-, and small-cap stocks gained 8.39%.  But if we dig a little deeper, a more complex story emerges.

Fully half of the gains registered by these 1500 stocks came from just five names – Apple, Microsoft, NVIDIA, Amazon, and Alphabet.  There is an obvious theme of technology common to all five, and more specifically, a general excitement around the prospects of artificial intelligence (AI).  NVIDIA, whose chips are used in the computers used for generative AI, gained 52% in Q2 (and is up 189% since January 1).  Apple’s virtual assistant Siri is expected to see quantum leaps in functionality with advances in AI.  (Apple stock was up 17.8% and the company approved a 4% dividend increase). The next two stocks on the list, Meta Platforms and Tesla, are also involved with cutting-edge technology.

Looking at the impact of the mega-cap stocks another way, the largest 17 stocks in the universe had a weighted-average gain of 18.4%, while the rest of the stocks only gained 3.5%.  One factor that contributed to this was a scramble to cash-rich companies in the face of the regional banking collapse that began in March.

Here is a quick list of newsworthy factors that impacted market returns in Q2:

  • On April 13 the Bureau of Labor Statistics reported a decline of 0.4% in the March Producer Price Index, leading investors to believe that the Fed would ease up on interest rate increases. And indeed, the Fed only implemented a single 0.25% rate increase in the quarter, on May 3.
  • Also in April, First Republic Bank disclosed details about the magnitude of customer defections in March. That stock fell by half on April 25 and sustained a selling spree of regional banks.  The assets of First Republic were purchased by JPMorgan on May 2, which was viewed as a win for JPMorgan (+12.4%) but a loss for regional banks (-5.7% as a group).
  • The debt ceiling negotiations dominated Wall Street headlines in the second half of May, with no appreciable effect on gains or losses but providing increased day-to-day volatility.
  • The DOL reported the creation of 253,000 new jobs in April and 267,000 in May, greatly exceeding the expectations of 180,000 and 220,000. Wage growth was measured at 4.4% (compared to an expected 4.2%), and the unemployment rate fell from 3.5% to 3.4%.  All of this was seen as an economy that was in recovery.
  • Despite OPEC talking about oil production cuts in April, fears of a global recession resulted in a precipitous drop in oil prices in May, to $72 for Brent Crude and $68 for West Texas Intermediate. AAA reports that the national average price for gasoline is down 27% from a year ago.
  • The IRS determined that all Tesla Model 3 and Model Y vehicles now qualify for the full $7,500 tax credit for electric vehicles. These had previously only qualified for half that amount due to the battery components coming from China. Tesla stock gained 26.2% in the quarter.

The Treasury market continues to defy logic.  Rates rose across the board, with the biggest increases seen in 1- and 2-year notes, and much more muted increases at the long end of the maturity spectrum.  On June 28 the magnitude of the 1-year vs. 10-year inversion reached 1.61%, a level not seen since 1981.

Rising interest rates also have a disparate impact on utility stocks, which tend to trade like bonds due to their high dividend yields.  Those stocks were collectively down 3% in Q2.

The dollar was mixed, with a big gain against the Japanese Yen and smaller gains against the currencies of New Zealand and Australia, but losses against the Euro, British Pound, Canadian Dollar, Swiss Franc, and Mexican Peso. 

Overseas stock returns were also mixed.  Among the biggest markets, Japan saw a local currency return of 15.57%, but the devaluing Yen eroded 9.15% from that when converted to U.S. dollars.  Japan continues to suffer from slow economic growth and high deficit levels in government due in large part to their aging population.  China’s stocks were collectively down 9% as the expected reopening of their economy post-COVID has not yet materialized, and the Communist Party has been cracking down on consulting and advisory firms with overseas ties, which has kept foreign investors at bay.  The United Kingdom (-0.62% local currency return) has significant exposure to the energy and basic materials industries, which suffer when commodity prices fall.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. 

Stock investing includes risks, including fluctuating prices and loss of principal. 

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. 

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. 

The S&P 1500 is a weighted average of the S&P 500, S&P Midcap 400, and S&P Small Cap 600 Indices. 

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The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. 

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