The stock market in 2023 – a review for investors

Autumn is a special time of the year. It is the season of cool mornings followed by a blaze of golden sunlight, the leaves putting on a bright display of colour and farmers gathering the fruits of their land. This has also been the case on the stock markets: the autumn review of the equity markets in 2023 is a glowing one. It has been a good year to date. This is an opportune moment to take stock and consider the outlook ahead.

An insight into bull markets: four bull market phases, three insights

After experiencing an impressive recovery, might the markets not already be overbought? This is a question that many investors ask themselves every now and then. The answer is “hardly”, as this can be a lengthy process. Being invested right from the start is not a prerequisite for reaping rewards. In any case, the best performance usually occurs late in the day. The problem is that in the end, practically everyone is dazzled by the general euphoria. Let’s take a brief look at the traditional life cycle of a bull market:

• Phase 1: bull markets emerge in the darkest hour. Once a market has lost all credibility amongst investors, it takes very little to bolster sentiment.
• Phase 2: bull markets hit multiple walls of worry. Bull markets always begin with a recovery that is in some way “inexplicable”. At this early stage, the bears claim that the recovery is no more than a false dawn and should not be taken seriously.
• Phase 3: bull markets mature as earnings grow. Over time, it is universally acknowledged that the market recovery was not an illusion, but prefigured a recovery in revenues and earnings. In this third phase, growing attention from the media attracts new investors, which pushes the market’s performance. But depending on the earnings performance, based on fundamental analysis it can sometimes take several years for the market to mature.
• Phase 4: bull markets end in a wave of euphoria. In its final phase, caution gives way to a collective sense of euphoria which decrees that valuations are actually “irrelevant”. At this stage, it tends to be only a matter of time before the bubble bursts like a party balloon. But by the time it does, it’s usually too late. Panic ensues before the darkest hour strikes again for the bull market.

Three lessons from the stock market in 2023

What we can be sure of is that hardly anyone expected the stock markets to perform as well as they have done in 2023 so far. Traumatised by the poor performance in 2022, many investors were infected by a rampant sense of pessimism early this year – which, as we know, is the best harbinger of a good year to come. We were thus able to gain three insights from this:

1. The first insight we have gained is that once again, “it’s all about being in the market”. In other words, “time in the market matters more than timing the market”. Yet although most investors endorse this principle, it is one they repeatedly breach. This is a costly mistake to make.
2. One should never underestimate the flexibility and resilience of companies. The constant competition amongst businesses to grow and improve is the life force of any national economy. Long-term progress stems from the power of better ideas, so that one plus one always makes more than two.
3. The economy is also governed by certain “laws of nature”: everything that rises has to fall at some point. The same applies to inflation, interest rates and markets. After the poor stock market performance last year, there were certainly good reasons to expect that 2023 would be a better year.

The bull markets of the past

The change of leadership on the global stock exchanges is perhaps one of the most important investment themes of our time. The US equity markets have consistently turned in an outstanding performance since 2009. But this is not set in stone. It seems that many factors are already priced into US stocks: US price/ earnings ratios currently average more than 20x – compared to some 10x in Europe. This huge discrepancy in valuations recalls the closing phases of major bull markets. In the aftermath of the global financial crisis in 2009, US stock markets were among the cheapest in the world, trading at a P/E discount relative to the rest of the world. This has transformed into a high P/E premium since then.

Any student of stock market history knows that every era has its winners. Thus the 1980s belonged to Japan, while European equities were on buoyant form in the 1990s prior to the ascent of China and the other BRICS nations (Brazil, Russia, India, China, and South Africa). This was followed by the second stellar rise of US stocks after the global financial crisis.

What the year-to-date review of 2023 means for investors

Let’s finish off by providing a summary of the three central ideas:

1. “It’s all about being in the market” – you have to be invested when the big bull markets are under way. However, there is a need for a consistent investment strategy including systematic diversification. Ultimately, no-one can predict a bull market with absolute accuracy.
2. “A rising tide lifts all boats”: those who invest in profitable long-term themes have no need to be nervous. As long as earnings are rising, management is experienced and valuations are reasonable, investors should stay invested.
3. Extreme valuations are frequently symptomatic of changes of leadership and stock market crises. When circumstances are at their best on the stock markets, investors should ask themselves whether now is the right moment to hedge their positions.