Market Performance Masks a Challenging Investing Climate ( Though the performance of different parts of the equity market often diverges, 2023 is off to a historic start from this perspective. The tech-heavy Nasdaq 100 ETF QQQ Quick Quote QQQ - Free Report) ( is off to a scorching start, up nearly 16% through roughly three months of action. Conversely, the small-cap Russell 2000 Index ETF ( IWM Quick Quote IWM - Free Report) ), which is chock full of financials and regional banks, has surrendered all its year-to-date progress and is slightly red. ( Regardless of which index you choose to look at, it is hard to argue that the market hasn’t been resilient. Banking institutions are failing by the handful. Inflation remains stubbornly high despite the rapid transition of the Federal Reserve’s “dovish” stance to one of the most “hawkish” stances in recent history. Furthermore, money flow has been hyper-focused on mega-cap tech stocks such as Apple ( AAPL Quick Quote AAPL - Free Report) ( ) and Microsoft ( MSFT Quick Quote MSFT - Free Report) ). Despite the challenging environment, six major catalysts may send stocks surging into year-end, including:
The amount of assets held by money-market funds has ballooned to nearly $5.5 trillion over the past week – an all-time high. In other words, investors are swapping “risk-on” investments in exchange for “risk-off” money market-market funds (which are paying the highest interest in years). Despite the fact that there are record flows into the safe-haven investment, markets have held well. If markets continue to stabilize, plenty of money will be on the sideline to push them higher into year end. “Fresh powder” on the sidelines: ( One week ago on financial television, The AI Revolution: Nvidia ( NVDA Quick Quote NVDA - Free Report) ( ) CEO Jensen Huang proclaimed “The iPhone moment of A.I has started.” Meanwhile, OpenAI and Microsoft’s ( MSFT Quick Quote MSFT - Free Report) ( ) ChatGPT is the new record holder for the fastest-growing user base in history. Though the mega-cap tech players are the biggest beneficiaries thus far, smaller companies such as C3.ai ( AI Quick Quote AI - Free Report) ) are beginning to benefit and garner investor attention. Image Source: Zacks Investment Research While A.I has done little to boost bottom-line growth so far, it is likely just a matter of time. Game-changing innovations lead to higher earnings, and higher earnings lead to an appreciating equity market. Speaking of earnings, investors must study the history of stock prices in relation to earnings. When viewing the past two major corrections, investors will learn that a turn-up in earnings is not a prerequisite for a turn in the market. Wall Street is a discounting device: In 2008 and 2020, the stock market turned prior to earnings turning up. In other words, investors “discounted” future earnings ahead preemptively. Image Source: Zacks Investment Research Banks collapsing, geopolitical tensions, and high inflation is causing a lot of investors to doubt the market. Don’t believe me? The S&P 500 put/call ratio is above 1, meaning more equity options traders are buying puts (bearish) than calls (bullish). If the majority of investors are on the same side of the boat it is not healthy for the market. Some level of doubt can help to propel markets higher. Markets prefer “the wall of worry”: Regional banks such as The banking crisis is not “systemic”: Silicon Valley Bank ( ) and First Republic Bank ( ( ) found themselves in trouble after not preparing properly for the rapid interest rate hike from the Federal Reserve. However, unlike the 2008 Global Financial Crisis, 2023’s banking woes are not systemic (for now). If smaller, weaker banks with liquidity crunches give way, they may stand to benefit larger, better positioned banks. First Citizens Bank ( FCNCA Quick Quote FCNCA - Free Report) ) is a prime example. The bank is up more than 50% this week after purchasing SVB’s distressed assets for pennies on the dollar. Image Source: Zacks Investment Research The years before the presidential election (like this year) tend to be the strongest on average from a historical perspective. Pre-election year seasonality:
Takeaway With all that is going on in 2023, investors can easily fall into the trap of being negative. The headlines are scary, areas of the market are volatile, and the future is always uncertain. However, investors who can look past the obvious and go against the crowd will likely have the upper hand moving forward.