The first half of the year has given investors plenty to process—from banking turmoil to the debt ceiling debate. Nevertheless, those with diversified portfolios of equities and fixed income were in a good position to benefit from both asset classes’ advances at the year’s midway point, a welcome turn from last year’s broad declines.
Here are three of the key trends from Q2 (with further detail and sourcing here):
While the market gains in 2023 are encouraging, the negative US returns for size, value, and profitability in Q2 may lead some investors to consider adjusting their exposure to these premiums.
This kind of premium underperformance isn’t particularly rare, however. Consider Exhibit 1 for perspective.
Exhibit 1: Negative Quarterly Observations: US Market, Size, Value, and Profitability Premiums
July 1963–March 2023
Number and percentage of quarters where market, size, value and/or profitability premiums were negative are calculated using monthly return data from July 1963 to March 2023. Market: Fama/French Total US Market Research Index minus the one-month US Treasury bill. Size: Dimensional US Small Cap Index minus the S&P 500 Index. Value: Fama/French US Value Research Index minus the Fama/French US Growth Research Index. Profitability: Fama/French US High Profitability Index minus the Fama/French US Low Profitability Index. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. The Dimensional and Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global.
Over the 239 quarters dating back to July 1963, three or more of the four equity premiums finished in the red 49 times. At least one negative premium was seen in 94% of the quarters. There have been more US presidential elections since 1963 (15) than quarters in which all four equity premiums were positive (14).
We expect positive premiums every day, but history tells us unexpected returns tend to dominate quarterly performance. Ignoring quarter-to-quarter uncertainty is important because premiums can turn around quickly.In the case of those 49 quarters with three or more negative premiums, only one of those premiums on average was negative for the subsequent 12 months. And over the long haul, tilting towards drivers of higher expected returns increases the likelihood of meeting future financial goals.
Dimensional Fund Advisors