Equities Outpace Bonds in 2023
In the most significant shift in market sentiment since 1999, equities have emerged as the favored investment class of the year, defying earlier predictions that labeled 2023 as the “Year of the Bond.” Forecasts made in December 2022, reflecting a prevailing sense of economic despondency, seemed to be materializing in early 2023, supporting the anticipated dominance of bonds.
However, from financial hubs like Hong Kong and London to New York, the demand for bonds has taken a backseat to the surging popularity of equities. This shift has triggered a substantial global rally, and analysts are expressing heightened optimism about equities, signaling that the momentum is far from waning.
Despite the recent interest rate hike by the Federal Reserve, there is a prevailing sentiment that aggressive rate increases are coming to a halt, with last week’s hike potentially being the final one. Coupled with a more dovish tilt in monetary policy, this should have positioned bonds as a safety net against potential economic downturns.
Contrary to expectations, both analysts and the Federal Reserve are no longer foreseeing a recession in the U.S. economy. Economic growth is continuing to accelerate, new jobs are being created, and inflation is moderating. Many experts are advocating for equity investments, while bonds, traditionally considered a safe haven, are falling short of their reputation. With recession predictions diminishing, the prevailing term in the markets is now “A Soft Landing.”
The shift from bonds to equities has caught many seasoned investors off guard. Data for Exchange Traded Funds (ETFs) in early 2023 reveals a preference for equities over bonds, marking a reversal from the beginning of the year.
It’s important to acknowledge that bonds have delivered positive returns for investors, offering significant yields with relatively low risk. However, few foresaw the substantial gains in equities, particularly evident in the Nasdaq 100, which, dominated by tech stocks, posted a remarkable 44% increase.
Nevertheless, seasoned experts caution that there are additional factors to consider. For instance, the decrease in inflation could be attributed to declining energy prices, and the impact of the 5 ¼% interest rate hike may take up to two years to fully manifest in the market. With equities experiencing an upswing, the astute investor may not be hastily dismissing bonds just yet.