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The strong headline FT Wilshire returns do not reflect market undercurrents
Exhibit 1 shows the return profile for the FT Wilshire 5000 since the start of last year, showing how it has maintained an upward trajectory from the low reached last October. However, the 8.8% return for 2023 YTD (through to the end of May) belies the picture of a significant bifurcation between the winners and losers materializing below the surface.
Exhibit 1: The FT Wilshire 5000 has continued to trend higher from the October 2022 low
Source: Wilshire. Data as of May 31, 2023
Exhibit 2 compares the profile of the return for the headline FT Wilshire 5000 index YTD (red) versus the return of the FT Wilshire 5000 ex technology sectors (blue). Ex technology, the index has posted a negative -1.2% return YTD and shows a loss in momentum in Q2.
Exhibit 2: YTD the FT Wilshire 5000 Index ex technology sectors has declined -1.2%
Source: Wilshire. Data as of May 31, 2023
Exhibit 3 displays the sector weighted performance contributions to aggregate market returns for both Q2to date (dark blue) and YTD (light blue). The AI fueled rally in the tech sectors has seen them dominate return contributions over both periods.
Exhibit 3: Sector-weighted performance contributions to aggregate market returns
Source: Wilshire. Data as of May 31, 2023
Exhibit 4 shows the relative performance of the sub sectors within the FT Wilshire 5000 Technology industry group. It clearly shows the significant uplift in the relative performance of the Semiconductor sector in Q2 reflecting the focus on Nvidia Corp as a key AI beneficiary.
Exhibit 4: The Semiconductor sector has been the main AI trade beneficiary
Source: Wilshire. Data as of May 31, 2023
Exhibit 5 shows the combined weighting of the top 10 stocks within the FT Wilshire 5000 index over three time periods. The current combined weighting of 25.9% exceeds the level reached ten years ago and importantly the 20.3% weighting attained at the peak of the Technology, Media, and Telecoms (TMT) bubble in early 2000.
Exhibit 5: The top 10 stocks weighting now exceeds the TMT peak level.
Source: Wilshire. Data as of May 31, 2023
Exhibit 6 compares the return contribution generated by the top 10 stocks and compares them to the respective aggregate market returns. In the final year of the TMT bubble the market returned 24.1% with the top 10 stocks contributing 9% (over 1/3rd)of the aggregate return. So far in 2023 the market has returned 8.8% with the top 10 stocks contributing 8.4% (95%) of the aggregate return. In this respect the market is delivering the most concentrated returns this century.
Source: Wilshire. Data as of May 31, 2023
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2023 has witnessed some key inflection points and reversals in market behavior compared with the 2022
2023 has witnessed some key inflection points and reversals in market behavior compared with the 2022. One of the most notable shifts has been the resumption of deteriorating market performance dispersion. Exhibit 1 shows that 2022 saw the equally-weighted FT Wilshire 5000 significantly outperform the market cap weighted index but 2023 has seen this pattern reversed.
Exhibit 1: The Equally weighted index has started to underperform its market cap peer.
Source: FT Wilshire
Another gauge of market performance dispersion is the comparison between the return of the median stock with that of the aggregate return of the top ten stocks. Exhibit 2shows that 2022 saw the median stock outperform by c.10% but so far 2023 has seen a significant reversal with the top 10 stocks outperforming by more than 20%.
Exhibit 2: Comparing the performance of the median stock to that of the top 10 stocks
Source: FT Wilshire
Another key dynamic of market rotation in 2023 has been the reversal in Style performance.
Exhibits 3A &B3 show the scale of reversal in the Growth v Value and Large cap v Small cap relative performance in 2023 .
Exhibit 3A: 2023 has seen a strong rotation back to Growth style v Value
Source: FT Wilshire
Exhibit 3B: 2023 has seen a strong rotation back to Large cap v small cap style
Source: FT Wilshire
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The +7.3% return in Q1 was delivered in three distinct phases
Q1 returns were a function of 3 phases -A goldilocks rally in January (reflecting optimism that a recession would be avoided, and the Fed were almost done) followed by a sharp decline (from the start of February to mid-March) driven by concerns over both a hawkish Fed and bank contagion angst. Finally, late March saw a strong rally as the 'fear trade' dissipated.
Exhibit 1: The return for the FT Wilshire 5000 index
Source: Wilshire. Data as of March 31, 2023.
The collapse of Silicon Valley Bank (SVB) in early March generated global contagion angst resurrecting 2008 GFC redux risk aversion in markets. Exhibit 2 shows that US banks saw the largest relative performance decline compared to other regions in Q1.
Exhibit 2: The relative performance of the bank sector across the regions in Q1
Source: Refinitiv. Data as of March 31, 2023.
The market response to heightened bank contagion risk was to price in a big decline in year-end interest expectations (reflected in the decline in 2-year bond yields) and a weakening in real yields. Once contagion angst started to dissipate by mid-March, easing financial conditions became the key driver behind the subsequent rally in risk appetite that saw the FT Wilshire 5000 post a +2.7% return for the month.
Exhibit 3: 2-year bond yields declined sharply
Source: Factset. Data as of March 31, 2023.
Rather than the emergence of bank contagion concerns, the key feature of Q1 performance was the strength of the recovery in Technology stocks. Exhibit 4 shows the relative performance of the technology sector and the relative performance of the growth style versus value. The performance of technology and growth style (long duration equity trades) is closely correlated to movements in US real yields. The positive inflection in Q1 was connected to signs that US real yields had peaked.
Exhibit 4: The relative performance of the technology sector, Growth style vs real yields.
Source: Wilshire, Factset. Data as of March 31, 2023.
Exhibit 5 shows the sector-weighted performance contributions (the combined impact of sector weight and sector performance) for the FT Wilshire 5000 for Q1 vs the whole of 2022. The combined contributions for the technology and digital information sectors in Q1 accounted for the majority of the 7.3% for the index. This is a mirror opposite of the negative contributions they generated in 2022.
It can also be seen that the negative contribution for financials (this includes banks) was relatively small in Q1.
The tech rally trumped bank angst in Q1
Exhibit 5: The decomposition of market returns - 12months and YTD.
Source: Wilshire. Data as of March 31, 2023.
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While the FT Wilshire 5000 adopted a risk off tone in February…
Having rallied in January on optimism that a recession would be avoided, the release of surprisingly strong labor market data forced the market to reappraise the trajectory of interest rates (dispelling any notion of them nudging lower later this year).This generated a cautious risk off tone that pushed the FT Wilshire 5000 -2.4% lower in February. However, the index is still up 4.4% YTD.
Exhibit 1: Risk aversion came to the fore in February driven by a rise in market interest rate forecasts
Source: Wilshire. Data as of February 28, 2023.
A key feature to the 2022 drawdown was the persistency of the decline in technology stocks. Interestingly, the February risk off move saw the technology sector outperform, delivering a positive sector weighted contribution to return (see Exhibit 2). In fact, year to date the technology and digital information and sectors have been the dominant positive contributions to aggregate returns. This is a mirror opposite to the 2022 dynamic.
Exhibit 2 : Sector weighted contributions to aggregate returns - YTD and February 2023
Source: Wilshire. Data as of February 28, 2023.
The positive inflection in the performance of the FT Wilshire Large Cap Growth index relative to Value that started in January persisted in February. This is a reversal of the 2022 dynamic (Exhibit 3). This rotation has occurred despite the rise in bond yields and real yields in February - these were key drags on highly valued Growth stocks in 2022.
Exhibit 3: Growth v Value style performance continues to inflect higher.
Source: Wilshire. Data as of February 28, 2023.
Exhibit 4 compares the performance of the top 10 stocks in the FT Wilshire 5000 to the performance of the median stock to gauge the degree of performance dispersion. 2022 saw the median stock outperform the top 10 stocks implying a widening of dispersion. However, 2022 year-to-date has seen the opposite occur with the top 10 stocks significantly outperforming the median stock. This narrowing of dispersion has marked the return to the dominance of the few that characterized the market prior to 2022.
Exhibit 4: Comparing the return generated by the top 10 stocks v the median stock
Source: Wilshire. Data as of February 28, 2023.
Exhibit 5 decomposes market returns drivers into the contribution from changes to dividends, changes to EPS forecasts and changes to valuation. In the case of the US market, over the last 12 months the negative return was mainly attributable to the significant decline in PE valuation (grey bar). In 2023 the opposite has occurred with the positive return been driven by the expansion in the PE multiple.
Exhibit 5: The decomposition of market returns - 12months and YTD
Source: Refinitiv. Data as of February 28, 2023.
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The FT Wilshire 5000 has appreciated 14.5% from the mid-October low
Anticipation of a pivot in the degree of Fed hawkishness was the catalyst behind the recovery in risk appetite that commenced in mid-October last year. This positive momentum continued in January producing a return of 6.9% for the FT Wilshire 5000 for the month. From the mid-October low, the FT Wilshire 5000 had appreciated 14.5% to the end of January.
Exhibit 1: The risk rally that started in mid-October last year continued into January
Source: Wilshire. Data as of January 31, 2023.
Exhibit 2 breaks the rally in the FT Wilshire 5000 since mid-October into two phases (October to December versus January). In the first phase, the rally was still defensive in nature represented by the marked outperformance of the Value style. By contrast, January saw a similar return for the market but this time it was driven by the outperformance of the Growth style.
Exhibit 2: A rotation to the Growth Style in January
Source: Wilshire. Data as of January 31, 2023.
Exhibit 3 shows relative performance of the FT Wilshire large Cap Growth versus Value and the US 10yr TIP real yield inverted. Style rotation responds to inflections in the real yield. The decline in the real yield in January has contributed to the Growth style outperforming the Value style by 5.7%
Exhibit 3: Growth style outperformed in January helped by falling real yields
Source: Wilshire, Refinitiv. Data as of January 31, 2023.
Exhibit 4 compares the sector weighted contributions to the returns for the Growth and Value style indexes in January. Growth benefitted significantly from the larger respective contributions generated by four sectors - Digital Information, Technology, Consumer Goods and Transportation. These tend to be seen as long duration growth sectors that respond positively to declining real yields.
Exhibit 4: Comparing the sector weighted contributions for Growth and Value
Source: Wilshire Data as of January 31, 2023.
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The FT Wilshire 5000 delivered the 4th largest annual drawdown since 1970
The almost 6% decline in December resulted in the FT Wilshire 5000 registering a decline of -19% for 2022. This constitutes the fourth largest annual drawdown since the inception of the index in 1970.
Markets and risk aversion responded to a perfect storm of war (Ukraine), inflation, real income and supply chain shocks and a rapid rotation to restrictive financial conditions just as economies were recovering from the COVID impact - all making 2022 an annus horribilis.
Exhibit 1: Largest Calendar year drawdowns for the FT Wilshire 5000
Source: Wilshire and Refinitiv. Data as of December 31. 2022
What made 2022 particularly difficult was the lack of diversification opportunities. For example, Exhibit 2 shows that 2022 was the first time in 40 years that both bonds and equities delivered simultaneous negative returns.
Exhibit 2: Simultaneous decline in US equity and bond returns
Source: Wilshire and Refinitiv. Data as of December 31. 2022
Exhibit 3 shows the ranked FT Wilshire 5000 sector-weighted performance contributions for 2022. Almost half of the aggregate decline in the FT Wilshire 5000 is accounted for by the scale of negative contributions delivered by the Digital Information and Technology sectors.
Exhibit 3: Sector weighted contributions for the FT Wilshire 5000 in 2022
Source: Wilshire. Data as of December 31, 2022
Exhibit 4 depicts the -25.1% underperformance of the Growth style relative to Value in 2022. This has effectively unwound the rotation to Growth that occurred during the immediate aftermath of the COVID pandemic.
An important driver of underperformance of the Growth style was the negative valuation impact of rising real yields in 2022.
Exhibit 4: Growth Style performance relative to Value Style
Source: Wilshire. Data as of December 31. 2022
Exhibit 5 examines the sector-weighted contributions for both the Growth and Value style indices. Value benefitted from a larger positive contribution from the energy sector compared to the Growth Style. It also benefitted from not incurring the scale of negative contributions in the digital information, technology, and consumer goods sectors.
Exhibit 5: Comparing the sector weighted contributions for the Growth and Value Style indices
Source: Wilshire. Data as of December 31. 2022
Comparing the performance of the top 10 stocks by market cap (equally weighted) to the performance of the median stock in the FT Wilshire 5000 index is a useful gauge of performance dispersion. Exhibit 6 shows the scale of reversal in dispersion from 2021 to 2022. In 2021, median stock performance significantly lagged the return delivered by the top 10 stocks (negative dispersion). 2022 saw the median stock outperform delivering an improvement in dispersion characteristics.
Exhibit 6: Comparing the performance of the top 10 stocks to the median stock
Source: Wilshire. Data as of December 31. 2022
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Bear markets are not linear – they typically witness numerous rallies
From January 3rd to the recent low on October 14, the the FT Wilshire 5000 had registered a drawdown of -25.9% the sixth largest since 1980. The key observation about bear markets is that they are not linear – in fact they often move in a sawtooth manner marked by numerous bear market rallies. This has been observable in the trajectory of the FT Wilshire 5000 returns this year (see chart below). Bear market rallies reward the ‘sell the bounce’ discipline, the antithesis of ‘buy the dip’.
Exhibit 1: Bear markets typically see numerous tradeable rallies
Source: Wilshire and Refinitiv. Data as of October 31, 2022
To reiterate the point that bear markets are not linear we have measured the trading pattern of bear markets (lasting more than three months) registered by the FT Wilshire 5000 since 1980. This shows that around 45% of the trading days witness upward moves. The bear market is driven by the compounding effect of the average daily move in a down day being -1.4% vs the average daily move on an up day being +1%.
Exhibit 2: The trading pattern of bear markets
Source: Wilshire and Refinitiv. Data as of October 31, 2022
If bear markets witness numerous bear market rallies, how can we identify when a rally is marking a nadir followed by a sustained positive move?
One answer to this is to wait for key technical signal confirmation. The ‘Golden Cross’ (the positive intersect of the 50-day moving average with the 200-day moving average where the latter has bottomed) is a useful tool aiding the identification of major market inflection points.
Exhibit 3: The ‘Golden Cross’ helps identify key inflection points
Source: Wilshire and Refinitiv. Data as of October 31, 2022
The FT Wilshire 5000 rallies 8.2% in October
Having fallen sharply over the prior four-week period the FT Wilshire 5000 started to inflect sharply higher from mid-October closing out the month with a +8.2% return. There were two principal catalysts behind the recovery in risk appetite. The first was the market registered as significantly oversold in mid -October, reaching levels that typically see a subsequent rebound. The second catalyst was speculation that the Federal Reserve was becoming increasingly concerned about tightening too aggressively given mounting recession headwinds.
Exhibit 1: A robust recovery in the latter half of October
Source: Wilshire. Data as of October 31, 2022.
A key attribute of the recovery in risk appetite was the notable preference for Value over Growth as measured by the FT Wilshire 5000 style indexes. In October the Large Cap Value style index delivered a return of 11.6% while the Large Cap Growth style index only appreciated 4.2%. This rotation has been a dominant theme through the course of 2022 with Value outperforming Growth by 21.3% year to date.
Exhibit 2: A continuation of the sustained preference of Value vs Growth in 2022
Source: Wilshire. Data as of October 31, 2022
Dissecting market returns using sector weighted contributions ( the combined impact of sector performance and sector weighting) October saw the largest positive contribution from Financials followed by energy. Real estate and transportation sectors delivered the lowest contributions.
Exhibit 3: October performance driven by Financials and Energy
Source: Wilshire. Data as of October 31, 2022
The YTD drawdown of-24.9% as of 30th is now the sixth largest witnessed over the last 40 years as shown in Exhibit 3.
Exhibit 4: Putting the YTD drawdown into perspective
Source: Wilshire and Refinitiv. Data as of October 31, 2022
A key feature of 2022 has been the sustained strength of the US dollar
2022 has seen persistent strength in the US dollar aided by positive interest rate differentials, haven status and the perception the US is less exposed to the Ukraine invasion energy shock. Exhibit 1 shows the long-term performance of the DXY dollar index and the 16.8% YTD return has pushed the dollar back to levels not seen since the turn of the century.
Exhibit 1: The dollar is back to levels last seen over 20 years ago
FX swings can have a large impact on unhedged regional equity returns depending on the location of investors. Due to GBP, Euro and JPY weakness, investors in the UK, Europe and Japan have a very different perception of regional market returns based in GBP, Euro and JPY versus the returns seen by a US dollar-based investor over both Q3 and YTD periods. For instance, it can be seen in exhibit 2 that UK unhedged investors (courtesy of the 8.2% decline in the pound) saw a positive return from US equities in Q3.
Exhibit 2: Comparing UK and US (unhedged) equity return profiles for Q3
Most commodity prices are denominated in dollars. Consequently, when the dollar appreciates it offsets the impact of any fall in prices to non - US dollar-based participants (and vice versa). For instance, exhibit 3 shows that although the oil price declined 22% in Q3 in dollar terms, due to the depreciation of sterling, euro, and the yen against the dollar the oil price drop denominated in those currencies is more muted. The distortion of the move in the dollar on the regional oil price is even more extreme looking at two-year data.
Exhibit 3: The impact of the dollar on regional oil price moves
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