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How Market and Premium Performance in the First Half of 2023 Should Shape Your Outlook for the Rest of the Year Thumbnail

How Market and Premium Performance in the First Half of 2023 Should Shape Your Outlook for the Rest of the Year

Markets & Economy

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):

  1. Global stock markets continue to bounce back. The MSCI All Country World IMI Index returned 6% over the quarter and outperformed global bonds1 for the third consecutive quarter. 
  2. Information technology was the best-performing sector2, lifting the returns of large growth stocks with low profitability, while value-oriented sectors lagged the overall market3. In the US, size, value, and profitability premiums were all negative.
  3. Equity returns in emerging markets lagged returns in developed markets4, but the premium environment was slightly more favorable, with positive size and value premiums.

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

1As measured by the Bloomberg Global Aggregate Bond Index.
2Based on the S&P 500 Information Technology Index, which rose 41.6% vs. 15.8% for the S&P 500 Index.
3Based on returns of MSCI All Country World Value Index, MSCI All Country World Growth Index, MSCI All Country World Small Cap Index, and MSCI All Country World Index (large caps). MSCI data © MSCI 2023, all rights reserved.
4As measured by MSCI World ex USA Index, which added 13.0%, and the MSCI Emerging Markets Index, up only 8.8%.