Asset Class Performance in 2023 and into 2024

The overall stock market, as measured by the S&P 500, is having a good year, up over 15%, also largely driven by its sizable tech exposure. This holds internationally as well, as the MSCI All Country World Index (ACWI) and its ex-U.S. counterpart (VXUS) are up 12% and 8% respectively.

High-yield bonds have done well, despite the lousy performance of most other fixed-income asset classes as rate rises that began in 2021 have continued into 2023.

High yield, which trades more on credit than interest-rate risk, has seen resilient price action, and without a sharp spike in defaults the high carry from owning high yield has propelled the asset class in 2023. Risk-parity strategies (labeled SPRT15T) – which allocate equal risk exposures to equities, bonds, and commodities – have eked out small gain in 2023 after a disastrous 2022.

Notable underperformers on the equity side are small-caps (labeled R2000) and midcaps (labeled MID). Despite having had very weak returns in 2022 and the 2023 rally in large-capitalization stocks, these have continued to be laggards, though they are up slightly on the year.

Rounding out the 2023 gainers, though with only small positive returns, are energy, commodities, and the dollar (labeled DXY). For energy and commodities, constrained supply (some of it intentional due to OPEC policy), the war between Israel and Hamas, and stronger-than-expected economic growth are the driving factors. Faster-than-expected growth and the associated rate increases have led to U.S. dollar strength. Of the 2023 winners, only energy, commodities, and the dollar were also winners in 2022. All other 2023 gainers had negative returns in the prior year.

The losers

On the equity side, the biggest losers in 2023 have been utilities, REITS, and staples. Utilities are a high-dividend, bond-like asset class, and often trade in line with the Treasury market. The increase in rates has been very negative for utilities, propelling them into last place by performance among the major asset classes in 2023. Close to the bottom of the performance chart are REITs and staples (XLP). REITs are high-dividend, rate-sensitive stocks, which has been bad for performance. In addition, REITs are heavily exposed to commercial real estate, which is suffering both from the post-COVID work-from-home trend and from tighter credit conditions among regional banks in the U.S. Staples, which are not heavily real-estate exposed and which benefit from a healthy U.S. consumer, have done poorly, perhaps because their high dividend yield makes them bond-like.

Medium-duration (labeled USTREAS and tradable via the VGIT ETF) and long-duration (labeled USTRLT and tradable via the VGLT ETF) Treasury securities have done poorly, as rates increased in 2023. Global sovereign bonds excluding U.S. dollar ones (labeled WBNDXUS) also did quite poorly, partially because rates increased, but also because of dollar appreciation (IGOV).

Financials have had a tough 2023 as the increase in the cost of deposits combined with their long-dated, low-rate assets to create earnings issues for many banks and other financial firms, and solvency problems for some, like Silicon Valley and First Republic banks. Given the continued inversion of the yield curve, the business of borrowing short to lend long will not look attractive for the next 6-12 months.

Healthcare stocks are having another bad year in 2023, as they did in 2022, mostly on the back of Medicare price rules introduced in the Inflation Reduction Act. While the sector has attractive long-term prospects, in the short-run the going is likely to be challenging.

Interestingly, except for utilities which saw a small gain in 2022, all of the 2023 losers were losers in 2022. Recent research has suggested that macro trends are pronounced in markers, and the last two years seem testament to this finding.

What comes next?

At QuantStreet, we invest using a signal which combines our machine-learning model’s return forecast with the last 12-month return trend of each asset class. The next table shows our combined signals for 12-month-ahead returns across our tracked asset classes (a subset of the performance chart shown above). Our forward-looking return rankings across asset classes reflect lagged asset class performance, but are tempered by the machine learning model’s forecast. For example, some of the 2023 losers look attractive based on our return forecasting model, so their signal turns out to be positive, despite highly negative 2023 returns. The 2023 winners sometimes look less attractive in the combined signal because their positive trend is offset by a weak model forecast.

Importantly, these signal rankings alone are not enough for optimal portfolio formation. Investors should also consider how risky each asset class is and how asset-class returns are correlated with one another. Using such risk information, the output from our signals shown above, as well as an understanding of their risk preferences and liquidity needs, investors can construct optimal portfolios that reflect these disparate influences. This is something QuantStreet does for its clients, but that is a story for another day.

Appendix

The names of the indexes shown in the returns figure are:

Harry Mamaysky is a professor at Columbia Business School and a partner at QuantStreet Capital.

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