Asset Class Performance Review for May 2023

After a month of chaotic headlines and tremendous uncertainty, May is finally over. As we approach 2023’s midpoint, it’s time to look back on the past month and get a feel of what we can expect next. That means checking in on asset class performance.

To be very clear: there is often a lot of disagreement over what constitutes an asset class. There is also frequent disagreement over the best ways to measure the performance of an asset class during any given time period. This is intended to be a snapshot of some of the most common asset classes in American portfolios today (which, yes, includes crypto now) by using reputable indices, funds, and ETFs to help us look at the big picture (see below for sources).

Your exposure to said asset classes may be the same or different as others like you. And it should be noted that this data is not intended to be any kind of financial advice and that different kinds of investments carry different risks which may not be appropriate for every investor.

This is just information. What you choose to do with it is ultimately your choice.

So whether you’re investing on your own, looking for insights that can help facilitate conversations with your financial planner, or are just plain interested in the numbers, this is where we stand as May rolls along.

Mixed Stock Market Return Implications

The S&P 500 edged higher this month, but the current stock market situation is a little more complicated than that.

We opt to use the S&P 500 in our asset class performance reviews for a couple of reasons. First, it serves as one of the most commonly recognized and understood indices tracking US stocks. But more importantly, it tends to offer a more complete picture of the stock market than other frequently referenced indices.

The Dow Jones Industrial Average, for instance, only has 30 constituents at any given point in time, most of which are considered larger, blue chip plays. The Nasdaq Composite only tracks stocks listed on the Nasdaq. It contains a larger number of constituents, clocking in at over 3,000 (though the Nasdaq 100 frequently gets cited, as well). But the index historically tends to skew towards a heavy technology concentration. The Russell 2000 also tracks a larger number of stocks, but these tend to be much smaller companies.

With this in mind, this is how those indices have performed relative to the S&P 500 year to date and in May.

Comparing Stock Index Returns to Gauge the Asset Class

As you can see, the Dow Jones struggled more than the S&P 500 last month and is down so far this year. To a certain extent, this sync can be tied to an overlap in holdings. The Russell 2000 was down in May and is still down for the year. But it’s the Nasdaq telling the full story on stocks.

The Nasdaq’s significant outperformance is similarly explained by its composition. On the one hand, there is substantial overlap between the S&P 500 and Nasdaq, too, with 100% overlap in the top five constituents in both.  Though one could argue that the top of both the Nasdaq and S&P 500 are technology-heavy, over 50% of the Nasdaq constituents are from the technology sector compared to just 25% in the S&P 500.

Why Tech Stock Concentrations Could Spell Trouble

The tech sector is having quite the moment. As the public (and investors) seem to collectively lose their minds over advancements in AI, money has absolutely poured into technology stocks. And understandably so. Even with experts from around the world sounding the alarm on the possible consequences of widespread AI applications, companies are moving at break-neck speed to capture the moment.

But in this wild, wild West of technological advancement, risks abound. The volatile technology can have unintended consequences, with resulting PR headaches potentially hurting individual stock prices. Perhaps more importantly, legislators continue to eye the space warily, with some already talking publicly about the need for regulation.

The question isn’t whether regulation is necessary or prudent. Instead, the question is whether Congress can get it right. They don’t exactly have the best track record when it comes to understanding and appropriately acting upon complex challenges, especially when it involves technology. And with heightened political dysfunction on full display in recent weeks, the odds of them getting things right feel relatively low.

Concerns About Real Estate as an Asset Class Loom Large

Real estate has had a rough year so far, with May being no exception. Arguably a side effect of the pandemic but definitely not helped by the Federal Reserve, commercial real estate developers have been hit especially hard. High vacancy rates have paired with rising interest rates to create one of the worst environments in years. As Peter Grant writes in the Wall Street Journal:

In the first quarter of 2023, investors purchased only $489.5 million in Manhattan office properties, the lowest volume since the fourth quarter of 2009, around the height of the global financial crisis, according to data firm MSCI Real Assets. By comparison, volume was $5 billion in the first quarter of 2022, MSCI said.

These numbers don’t bode well for what could come next, as major developers have started defaulting on their loans. But as Grant explains, sellers scrambling for an exit might provide an at least temporary boost to the market as investors seize upon lower prices.

On the residential side of real estate as an asset class, different factors have created an unfavorable climate. Consumers have also felt the sting of rising rates, but it’s more complicated than that. Limited existing home inventory has paired with the rate hikes to push many sellers to the sidelines, bolstering homebuilder confidence as they seek to fill the gap but hurting those househunting.

But home prices have started inching up again after a dip. On the one hand, that could push more sellers into the market. Except the Fed pays close attention to home prices when contemplating inflation and rate hikes. Should rate hikes continue (and even if not in June, this seems likely), would-be buyers could find themselves unable to secure a mortgage. If that happens, both sellers and homebuilders could face hard times.

Hedge Fund Headaches: Still Smart Money?

The whole reason people invest in hedge funds is that they are supposed to offer an advantage over trading on your own or through more conventional portfolio strategies. That hasn’t been the case this year. Though eking out a small gain so far in 2023, they stumbled again as an asset class last month, notably underperforming stocks.

Debating why funds generate lackluster returns presents a difficult challenge. The variety of hedge fund strategies in play means broad generalizations about hedge funds as an asset class may not always offer salient performance insights for those looking to allocate in the space. Technology-focused hedge funds, for instance, are unsurprisingly up by double digits. Emerging markets funds, on the other hand, have fallen into the red.

And for many accredited investors, the indices are not what they’re hoping to invest in anyway. They’re considering an allocation to specific funds. To this end, indices may offer a general feel for how hedge funds are performing, but investors will need to conduct extensive due diligence to determine suitability before investing.

Cryptocurrencies Still Running Hot

This year has been inarguably good in terms of cryptocurrency performance as an asset class. Positive performance in other asset classes has been middling. So if you’re looking at crypto’s 60%+ returns, you might be forgiven for having visions of Bitcoin dancing through your head.

But what that number does not represent is how many cryptocurrencies actually last. Since 2021, for instance, the crypto commentary site CoinGecko reports they saw more than 3,000 coins they tracked fail. Investors lost trillions of dollars in crypto last year.

Then came the Bittrex bankruptcy filing this month. It was not the largest player in the game and US operations shut down in April. But the circumstances surrounding the filing highlight another significant risk facing cryptocurrency investors: an uncertain regulatory environment.

Bittrex US fell apart after facing stiff SEC penalties for failure to appropriately register. This came on top of additional penalties for failure to block trading by investors in countries like Iran and Cuba.

As regulators look for ways to provide sufficient oversight, investors may get caught in the crosshairs. So while that 60% run-up this year looks attractive, heavy allocations may generate more pain (and anxiety) than anyone needs.

Looking Forward to Asset Class Risks

One of the most important things to watch in June will be what the Fed decides to do next. Many investors and analysts interpreted recent comments by Federal Reserve Governor Philip Jefferson about a potential “hawkish pause” as a sign that rates will hold steady for now. But according to the CME FedWatch tool, more than 28% of traders believe we will see a hike. They often cite concerns about rising housing costs and a still strong labor market. This could have significant consequences for both real estate and bonds as we move toward July.

Further complicating matters will be the aftershocks of the debt ceiling debate. It looks likely that the Senate will pass the House bill, but that doesn’t mean the markets will rally. Following the deal made in the August 2011 debt ceiling standoff, the market fell sharply, with the velocity of the fall augmented by the S&P downgrade of the US credit rating. It didn’t rebound to its level on the day of the deal passage until January 2012.

But that’s not all. With Speaker McCarthy announcing his commitment to continue pursuing non-defense spending cuts, a GOP primary field rife with sociopolitical landmines, and relative uncertainty regarding regulatory changes, headlines will matter this month. The depth of their impact remains to be seen.

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This is an updated version of an article from 2020. © 2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.