What lessons should we draw from big financial news items of 2023?

From rising interest rates to the outperformance of the Magnificent 7, it was an eventful year for markets. Below, we look back and summarize Dimensional’s perspective on some of the key events for investors

1) When Headlines Worry You, Bank on Investment Principles

On Friday, March 10, regulators took control of Silicon Valley Bank as a run on the bank unfolded. Two days later, regulators took control of a second lender, Signature Bank. Around this time, US stocks began a decline … only to resume their ascent weeks later. While uncertainty is unavoidable, remember that market timing is futile and “diversification is your buddy”.1 Ignoring headlines and focusing on time-tested principles may help you avoid making shortsighted missteps.

2) High Rates Don’t Put the Brakes on Stocks

Do stocks make sense in a world where short-term US Treasuries are yielding north of 5.5%?2 Take solace in the historical evidence, which suggests interest rates are of little help in predicting stock returns. In years with above-median interest rates since 1955, US stocks returned an average of 12.1%. This is slightly higher than the average return (11.6%) in years with below-median interest rates, although the averages are statistically indistinguishable from each other.

3) Magnificent 7 Outperformance May Not Continue

Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla continue to capture the focus of investors as these large growth names have outpaced the bulk of global equities.4 However, eye-popping returns for top stocks tend to occur before they reach the top of the market. Once there, these stocks post returns that tend to lag those of the market. Rather than seeking additional exposure to the Magnificent 7, investors should ensure their portfolios are broadly diversified to capture the returns of whatever companies ascend to the top in the future

4) The Market Is the Ultimate AI

There was plenty of attention on artificial intelligence this year, but the market is an even smarter information-processing machine. Material information gleaned from running AI processes is very likely a subset of the vast information set known by the market in aggregate and reflected in market prices. Sure, AI may be able to help in areas such as the execution of trades. But there doesn’t seem to be reason to think that AI should fundamentally influence the way people think about stock prices anytime soon.

What lessons should we draw from big financial news items of 2023?