The 10 greatest surprises that changed the game for investors in the first half of 2023
- First-half events suggest 2023 could become a year that was one of the hardest to predict in markets and economics.
- A much-predicted recession failed to show up and stocks staged an impressive rally, riding an AI boom that no one saw coming.
If the events of the first half are any guide, 2023 could be well on its way to become one of the hardest years to predict in markets.
From a much-predicted recession that never arrived to an artificial-intelligence boom that no one saw coming, economic and investing trends have consistently defied the predictions of Wall Street titans. And, six months into the year, things look no easier to interpret.
They say past performance isn't a guide to future results - yet, as we cross the mid-way mark of this eventful year, it's a useful exercise to take a step back and recap the biggest of the least expected events that shaped the financial-market narrative so far.
Here's a list of the 10 biggest surprises for investors from the first half, based on a list compiled by Charlie Bilello, director of research at Pension Partners.
1. The recession that wasn't
In late 2022, nearly everyone was in agreement: the US economy was either already in recession or headed for one in 2023, Bilello wrote in a blog post, citing the results of a mid-December survey that had 85% of the respondents expecting economic contraction.
"The list of indicators said to be predicting a recession was a long one, including a falling stock market, historic lows in consumer sentiment, and the inversion in the yield curve," he wrote. "Halfway through 2023, we're still waiting for the recession prophesies to be fulfilled."
"First quarter real GDP was positive (+2% annualized) and the current expectation is that the second quarter will be as well (Atlanta Fed "GDPNow" is forecasting +2.1% growth). A key driver of that growth has been the continued strength in the labor market, with 30 consecutive months of job gains and an unemployment rate that hit a 54-year low in April (3.4%)," he added.
2. The irrepressible ebullience of the stock market
The stock-market outlook at the end of 2022 was as bleak as bleak could be – against a backdrop of surging interest rates, high inflation, the Ukraine war and recession fears. Wall Street experts were issuing predictions for a further crash in equities left, right, and center – following last year's 19% slump in the S&P 500.
"Strategists were actually predicting a down year for stocks in 2023, a rarity on the perennially bullish Wall Street," Bilello wrote. "What has actually transpired? One of the best starts to a year in history, with the S&P 500 up nearly 16% in the first half."
"Perhaps even more surprising was the collapse in volatility, with the VIX closing below 13, levels we haven't seen since early 2020," the economist added.
3. Collapsing banks
The back-to-back failures of Silicon Valley Bank and Signature Bank in early March sent shockwaves across the financial world. Just days later, the 167 year-old Swiss banking giant Credit Suisse ended up being taken over by UBS.
Tremors from these events continued to sweep the US banking sector for many more weeks – fueling a flight of deposits from smaller, regional lenders into bigger names and also triggering a collapse in their stocks. In May, another regional bank, First Republic, was acquired by JPMorgan.
"Fears of another 2008 were quickly put to rest, however, with the FDIC absorbing all losses above the limit and all depositors walking away unscathed. At the same time, the Fed provided a massive boost in liquidity to banks ($392 billion), interrupting the steady balance sheet reduction that had started in April 2022," Bilello wrote.
4. Higher rates for longer
After shocking markets into submission in 2022 with the fastest interest-rate increases in four decades, the Federal Reserve has continued to tighten policy in 2023 in a bid to tame inflation.
While inflation has more than halved from the last summer's highs, it still remains way above the central bank's 2% target – and, unsurprisingly, the Fed has signaled more increases. Policymakers' hawkish stance has forced investors to push back bets for rate reductions.
Rate-cut "expectations have been pushed out into 2024. "Higher for longer" seems to be the new mantra," according to Bilello.
5. The inflation pullback
"Fears of the inflationary spiral of 2021-22 continuing in 2023 have not materialized," he wrote.
The annual rate of US consumer-price increases fell for 11 straight months to 4% in May from last year's peak of 9.1%. It is expected to have declined further toward 3% in June.
"The supply chains have healed from the many pandemic disruptions, with freight rates back to 2019 levels. And for the first time since March 2021, wages are outpacing inflation," Bilello wrote.
6. A resilient housing market
The early part of 2023 was marked by mounting pessimism toward the housing market, with elevated mortgage rates eroding affordability. The consensus prediction was for home prices to tumble through the year.
However, the market has held up surprisingly well so far – supported by a slide in the supply of existing homes that has more or less evened out the drop in demand.
Redfin data showed 1.37 million US homes were up for sale in May - the least in data going back to 2012.
7. Rebounding earnings
"The earnings recession that began in 2022 was widely expected to continue in 2023," Bilello wrote. "But market participants did not appreciate how rapidly companies had adapted to changing conditions, and S&P 500 earnings actually showed a 5% year-over-year increase."
"Driving that increase as an expansion in profit margins, which came as a surprise to many."
8. The AI boom
The sensational debut of ChatGPT sparked a tidal wave of investor enthusiasm over the rise of artificial intelligence, powering a stunning rally in stocks related to the groundbreaking technology, and the tech sector in general.
Chipmaker Nvidia was the biggest gainer from the trend, with the market viewing it as well-positioned for benefiting from a surge in demand for high-end computing infrastructure that's required for AI. The stock jumped 189% so far this year, joining the elite $1 trillion market-cap club in May.
Big Tech names such as Microsoft, Meta and Apple delivered impressive equity gains, riding the AI hype, with the iPhone maker becoming the first company every to cross the $3 trillion market-value milestone.
9. Travel is back
"There was an average of 2.65 million US airline travelers per day in the week leading up to the 4th of July, which was higher than any 7-day period in 2019," according to Bilello.
"Delta and United are both up over 40% this year on that trend. And with cruises expected to see a record number of bookings this summer, Royal Caribbean and Carnival have more than doubled," he added. "Finally, conferences are back, with Vegas attendance and hotel bookings at new highs."
10. Bulls beat bears
"There was no shortage of things for investors to worry about in 2022, but those who stuck with or added to portfolios were rewarded with one of the best first halves on record," he wrote. "Nearly every major asset class moved higher, the polar opposite of 2022."