A special, but not entirely unknown market situation
The stock performance in 2023 is astonishing at first glance. Despite further increases in interest rates and gloomy growth prospects, many stock markets have posted substantial gains. At the same time, market risk (i.e. volatility) continued to decline and has been trading at historic lows since the summer. But what - or rather who - is responsible for this market constellation, which does not fit into the economic picture at all?
As was already the case in the aftermath of the Covid crash in the spring of 2020, it is evident that a few stocks are driving market performance in the current market environment as well. And as then, it is U.S. technology giants such as Apple, Microsoft, Amazon, Meta (Facebook) and Alphabet (Google) that are playing first fiddle. Whereas three years ago it was primarily the digitalization accelerated by the lockdowns that was responsible for the share price surge, today it is the hype surrounding the topic of "artificial intelligence" and the expectation that "big tech" will be able to hold its own better than other sectors in the current economic downturn. We would like to show what this situation means for the market as a whole and for index investors in particular.
Cluster risks in the seemingly well-diversified index
A look back shows that the weight of "Big Tech" has steadily increased in recent years. As of Aug. 31, 2023, the largest 7 companies account for about 19% of the MSCI World. Just 5 years ago, their share was not even half. The market capitalization of this illustrious circle corresponds today to the share that Japan, UK, Canada, France, Germany and Switzerland together (!) take in the index. Looking only at the U.S. market (e.g. the broader S&P 500 or the NASDAQ 100 index), the concentration at the top takes on even more extreme features.
As already noted, with this high weighting, index performance depends to a large extent on a few stocks. This has led to a very distorted perception of the overall market in 2023. The seven largest stocks (also known as the "Magnificent Seven") are responsible for two-thirds of the 11.3% increase in the MSCI World (as of August 31, 2023, in USD). The large remainder of the companies fall more or less "under the radar". The mood on the stock markets then no longer looks as rosy as one might assume at first glance.
How long will the decoupling of the market and interest rates last?
This year, the price advances of the technology-heavy index giants have been completely decoupled from the development of interest rates and thus from the market as a whole. This can be seen, for example, in the correlation between the NASDAQ 100 Index and the yield of 10-year Treasuries (shown inversely in chart 2 for better illustration). While for years the performance of the technology index was rightly very strongly dependent on the development of interest rates, this pattern broke down in 2023 - certain "laws of nature" seem to have lost their validity. For passive investment solutions that mirror the index 1:1, this decoupling brought nice gains.