After entering the bear market in 2022, the US stock market rebounded in the first half of 2023. Year-to-date, Nasdaq has rallied by 27%, the S&P500 by 11%, and Dow Jones (DJIA) by 1.4%. You are likely in the green this year if you have been holding the indexes. The stock market rebound is in full effect, or is it? Let’s dive deeper into the data.
Comparison of major indexes
Although the Nasdaq has been on a massive rally this year, if we zoom out further, we can see that it also has the deepest correction among the indexes. From top to bottom, the Nasdaq corrected by 33%, S&P500 by 24.8%, and DJIA by only 20%.
The index which has the deepest correction also rebounded the strongest. In contrast, DJIA was mainly flat from last year.
Sectoral comparison
Let’s look at the sectoral performance to see how they perform between 2022 and YTD 2023.
If we look at the 2022 data, we can see that Communication Services, Consumer Discretionary, and Information Technology performed the worst. However, the same sectors performed the best YTD 2023. The Energy sector, which performed the best in 2022, is now the laggard among all industries.
We can further observe that the rebound only applies to some sectors. For example, financials, healthcare, consumer staples, and utilities have yet to rebound.
Looking deeper within each sector, we can also see the rebound is unequal.
In a typical bull market, all sectors usually rise. There is a saying that a tide lifts all boats. In our case, the lack of breadth for the stock market rebound is a question mark for now. This can indicate we are in a bull trap or the early stage of a bull run. If this is indeed a bull run, we will eventually see all sectors rise again.
What can we learn from this stock market rebound?
#1: The market is like a rubber band
The apparent pattern from this stock market rebound is that the one that corrected the most rebounded the strongest. Nasdaq corrected the most and is now leading the rebound among all indexes. If we look at the top three sectors that performed the worst in 2022 (Communication Services, Consumer Discretionary, and Information Technology), they now lead the rally in YTD 2023.
The market is like a rubber band: the more you stretch to one side, the stronger it will snap back to the other. Eventually, it will revert to its mean.
Please note that this applies only to good-quality stocks or indexes. Fundamentally good businesses will rebound after a correction.
Knowing this, even if your portfolio is down, you want to ensure you don’t miss the ensuing rebound after the market condition improves. The easiest way to achieve this is to keep dollar-cost averaging, practice patience, and stay invested through the up and down.
To describe this market behavior, we like the quote from Benjamin Graham: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Nobody can predict the movement of a stock in the short term, but in the long term, a good-quality stock will revert to its fundamental valuation.
#2: Emotional trap
If this is your first market correction experience, you may have felt a range of emotions when your portfolio keeps going down month after month. When you think the bottom is already in, it continues to drop. And this can last for months. Yes, the market is really good at playing with your emotion.
Here is an example of a stock that most investors should be familiar with:
Meta (Facebook) reached a high of ~$370 towards the end of 2021. Since then, it fell, reaching ~$90 a year later. That’s more than a 70% drop in the share price. And it took one year from the top to the bottom. It has since rebounded back to ~$270. If you own Meta stock, you can probably relate to the emotional rollercoaster this stock has put you through.
When Facebook first announced a decline in its user base, the market reacted strongly, and the share price tanked. The market was afraid that the Facebook growth era was over. This growth issue and the massive spending in the virtual reality department caused the share price to plummet. As the mainstream media keeps repeating this narrative, most investors continue to sell and sell. However, as Facebook became more efficient this year and the user base rebounded, the share price rebounded sharply. Well, don’t forget that Facebook is still a massive cash-generating machine.
If you are a long-term investor, this serves as a reminder not to be emotionally trapped by the market. If you sold when Meta reached less than $100 because you couldn’t handle the loss and yet to buy back again, you have missed the massive rally afterward.
#3: Is ‘stock picking’ for you?
Another observation is that the stock market rebound is unequal among sectors and subsectors. For example, while the Communication Services sector has rallied 33.8% YTD, the Utilities sector is still down -8.3% YTD. We also see that subsectors’ performance can diverge significantly. Note that this doesn’t mean the Utilities sector won’t recover. Actually, in a bull market, all sectors will recover. A tide lifts all boats.
Furthermore, some stocks are even down more than -90% from the top and haven’t rebounded yet. Some may never reach the high again. This phenomenon implies that if you are holding the ‘right’ stocks, you are doing well so far this year, while if you are holding the ‘wrong’ stocks, you may feel left behind.
General wisdom says you should only invest within your circle of competence. Invest in businesses that you understand. Knowing the company well will make you feel comfortable even when your holding underperforms. Remember, the stock price of a fundamentally sound business will likely revert to its fundamental valuation. Though, it may take longer than you expect.
If you don’t know or do not have the time to research companies, you may consider investing in broad market ETFs to reduce the risk of choosing the ‘wrong’ stocks. By investing in an ETF that tracks S&P500, you are already up 11.8% YTD. Not the hottest performance if we compare it to the best-performing sectors, but still very good considering the much lower risk involved.
