by MITCH ZACKS

Stocks started 2023 with a 4th of July-like bang, with the S&P 500 rallying nearly +17% in the first six months. The tech-heavy Nasdaq posted its strongest start to a year since 1983, with a stout +32% return. Small-cap stock (Russell 2000) performance was comparatively weaker, but still strong on a stand-alone basis with a 7.9% jump.

Strong equity performance in the first half took many market prognosticators by surprise, especially those who strongly believed the U.S. economy was charging toward a significant recession.

Of course, that recession never arrived. The U.S. Commerce Department released data last week showing the U.S. economy grew at a 2% annualized pace in the first quarter, which is substantially higher than the previous 1.3% estimate. The unemployment rate has barely nudged in the first half of the year, and the labor market continues to add jobs at a rapid clip. Consumer spending remains solid.

Economic resilience and strong market performance befuddle many, but it probably shouldn’t. Any time you see investors and financial media’s worst-case scenarios fail to materialize – with the economy performing a little or a lot better than most expect – the stock market generally performs well. As I’ve written time and again, positive performance in markets is often about reality versus expectations, and whether the economy did better or worse than expected.

In the first half of 2023, “better than expected” was a recurring theme:

It’s easy to surmise, using the above table, that the worst-feared economic outcomes simply did not come to fruition. And simply put, that’s what historically leads to market rallies.

Naysayers will cite the lack of breadth in the equity market’s strong first half, pointing to the disproportionate contribution of mega-cap technology stocks to the index’s overall performance. Enthusiasm for artificial intelligence (A.I.) led to a surge in interest in the biggest tech companies, the absence of which would have meant more muted returns for the market. After all, the top 5 companies in the S&P 500 account for 24.1% of the entire index.

These are fair points, but I think this narrative obscures what ultimately became a broader rally late in the second quarter. For Q2, the Russell 2000 (small-cap stocks) rose +5.2%, the S&P/Citigroup Value index was up +6.6%, the S&P 400 index (mid-cap stocks) was up 4.9%, and Consumer Discretionary was another large-cap sector that performed well, +14.6%. None of these indexes or sectors include mega-cap technology names.

It’s also true that fixed income categories held their own in the first half, with everything from Treasurys to junk bonds posting modestly positive gains. Many investors felt so negatively about the U.S. economy in the first half of the year that positive returns result in even more doubt. There must be a “major disconnect” happening, the thinking goes. But I would argue that the disconnect is in understanding how equity markets work.

Bottom Line for Investors

Many disbelievers in the current market strength have simply pushed out their timelines for recession and market turmoil. But we already know that this mindset has been costly over the last 8+ months, as the market has bounced well over +20% from bear market lows.

Is it possible that the U.S. economy enters a recession sometime in the next few quarters, and that it’s worse than expected? Surely. But signs right now point to any downturn being close to in line with broad expectations, which at Zacks we’ve been referring to as more a ‘garden variety’ type of economic downturn. As long as a recession isn’t worse than expected, then I don’t see a strong case for being out of stocks.

Der Beitrag Stocks Post “Surprising” Rally in the First Half of 2023 erschien zuerst auf Grossmutters Sparstrumpf.