Topline
Fervor over the potential end to the Federal Reserve’s interest rate hikes has fueled a stunning rally among riskier assets that fell to dismal lows last year, helping bitcoin and tech giants emerge as market leaders anew—even as some experts worry the trend may not last.
Key Facts
After crashing more than 60% last year, the price of bitcoin has skyrocketed 83% in 2023—making it the best-performing asset class among more than two dozen tracked by analysts at Goldman Sachs.
Buzz around institutional giant BlackRock applying for a bitcoin exchange-traded fund has helped the world’s largest cryptocurrency mint its stunning rally, but the risk asset has also benefited from inflation falling to the lowest levels since early 2021, giving investors hope the Fed would pause interest rate hikes (as it did) and potentially cut rates later this year to avoid a recession.
The potential for lower rates has similarly fueled a flurry of growth stocks, with the information technology sector, Nasdaq 100 and Russell 1000 Growth Index (all of which count Apple, Microsoft and Nvidia among their largest components) up 40%, 38% and 27%, respectively.
Even adjusted for risk using the Sharpe Ratio, which divides an investment’s return by a measure of volatility, the information technology sector, Nasdaq 100, Russell 1000 Growth Index and bitcoin are still top asset classes—far outperforming the S&P 500, which is up 14% this year after falling nearly 20% in 2022.
On the flipside, crude oil and energy stocks—which skyrocketed as the economy roared back during the pandemic—headline the year’s worst-performing assets, down 12% and 9%, respectively, as oil producers warn global economic concerns could drag on in the second half of the year and potentially hurt demand.
Investor sentiment has reached its highest level in over two years, Morgan Stanley strategist Michael Wilson pointed out in a recent note, describing the vast market differences—from last year’s steep declines to the first half’s stunning rally—as a transition from “fear to greed.”
Top Performing Assets In 2023 So Far
- Bitcoin, up 80%
- Information Technology, up 40%
- Nasdaq 100, up 38%
- Communication Services, up 36%
- Consumer Discretionary, up 31%
- Russell 1000 Growth, up 27%
Worst Performing Assets In 2023 So Far
- Crude Oil, down 12%
- Energy, down 9%
- Utilities, down 5%
- Financials, down 3%
- Health Care, down 2%
- Real Estate, flat
Key Background
Markets crashed last year as the prospect of higher interest rates fueled concerns the economy would falter—but the recession many experts predicted has yet to materialize. In fact, the latest batch of corporate earnings showed companies have been vastly resilient despite economic headwinds—and many have exceeded expectations. Average revenues rose 4% in the first quarter, compared with forecasts calling for a less than 2% growth. Nevertheless, there are signs of weakness. Fading fiscal support, less liquidity, and the impact of inflation falling faster than expected have strategists at Morgan Stanley heeding caution on the latest market rally.
What To Watch For
One big cautious signal, the median stock in the S&P is up just 3% this year—significantly lower than the overall return, as tech giants like Apple and Microsoft head up most of the gains. “The most troubling divergence remains in the strongest index, the Nasdaq,” says Wilson, noting breadth, as measured by the percentage of stocks outperforming the broader index—is at one of its most extreme points in history. “If this bear market rally is really a new bull market, this will need to change.”
The World’s Largest Technology Companies In 2023 (Forbes)
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