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The strong headline FT Wilshire returns do not reflect market undercurrents
Exhibit 1 shows the return profile for the FT Wilshire 5000 since the start of last year, showing how it has maintained an upward trajectory from the low reached last October. However, the 8.8% return for 2023 YTD (through to the end of May) belies the picture of a significant bifurcation between the winners and losers materializing below the surface.
Exhibit 1: The FT Wilshire 5000 has continued to trend higher from the October 2022 low
Source: Wilshire. Data as of May 31, 2023
Exhibit 2 compares the profile of the return for the headline FT Wilshire 5000 index YTD (red) versus the return of the FT Wilshire 5000 ex technology sectors (blue). Ex technology, the index has posted a negative -1.2% return YTD and shows a loss in momentum in Q2.
Exhibit 2: YTD the FT Wilshire 5000 Index ex technology sectors has declined -1.2%
Source: Wilshire. Data as of May 31, 2023
Exhibit 3 displays the sector weighted performance contributions to aggregate market returns for both Q2to date (dark blue) and YTD (light blue). The AI fueled rally in the tech sectors has seen them dominate return contributions over both periods.
Exhibit 3: Sector-weighted performance contributions to aggregate market returns
Source: Wilshire. Data as of May 31, 2023
Exhibit 4 shows the relative performance of the sub sectors within the FT Wilshire 5000 Technology industry group. It clearly shows the significant uplift in the relative performance of the Semiconductor sector in Q2 reflecting the focus on Nvidia Corp as a key AI beneficiary.
Exhibit 4: The Semiconductor sector has been the main AI trade beneficiary
Source: Wilshire. Data as of May 31, 2023
Exhibit 5 shows the combined weighting of the top 10 stocks within the FT Wilshire 5000 index over three time periods. The current combined weighting of 25.9% exceeds the level reached ten years ago and importantly the 20.3% weighting attained at the peak of the Technology, Media, and Telecoms (TMT) bubble in early 2000.
Exhibit 5: The top 10 stocks weighting now exceeds the TMT peak level.
Source: Wilshire. Data as of May 31, 2023
Exhibit 6 compares the return contribution generated by the top 10 stocks and compares them to the respective aggregate market returns. In the final year of the TMT bubble the market returned 24.1% with the top 10 stocks contributing 9% (over 1/3rd)of the aggregate return. So far in 2023 the market has returned 8.8% with the top 10 stocks contributing 8.4% (95%) of the aggregate return. In this respect the market is delivering the most concentrated returns this century.
Source: Wilshire. Data as of May 31, 2023
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The +7.3% return in Q1 was delivered in three distinct phases
Q1 returns were a function of 3 phases -A goldilocks rally in January (reflecting optimism that a recession would be avoided, and the Fed were almost done) followed by a sharp decline (from the start of February to mid-March) driven by concerns over both a hawkish Fed and bank contagion angst. Finally, late March saw a strong rally as the 'fear trade' dissipated.
Exhibit 1: The return for the FT Wilshire 5000 index
Source: Wilshire. Data as of March 31, 2023.
The collapse of Silicon Valley Bank (SVB) in early March generated global contagion angst resurrecting 2008 GFC redux risk aversion in markets. Exhibit 2 shows that US banks saw the largest relative performance decline compared to other regions in Q1.
Exhibit 2: The relative performance of the bank sector across the regions in Q1
Source: Refinitiv. Data as of March 31, 2023.
The market response to heightened bank contagion risk was to price in a big decline in year-end interest expectations (reflected in the decline in 2-year bond yields) and a weakening in real yields. Once contagion angst started to dissipate by mid-March, easing financial conditions became the key driver behind the subsequent rally in risk appetite that saw the FT Wilshire 5000 post a +2.7% return for the month.
Exhibit 3: 2-year bond yields declined sharply
Source: Factset. Data as of March 31, 2023.
Rather than the emergence of bank contagion concerns, the key feature of Q1 performance was the strength of the recovery in Technology stocks. Exhibit 4 shows the relative performance of the technology sector and the relative performance of the growth style versus value. The performance of technology and growth style (long duration equity trades) is closely correlated to movements in US real yields. The positive inflection in Q1 was connected to signs that US real yields had peaked.
Exhibit 4: The relative performance of the technology sector, Growth style vs real yields.
Source: Wilshire, Factset. Data as of March 31, 2023.
Exhibit 5 shows the sector-weighted performance contributions (the combined impact of sector weight and sector performance) for the FT Wilshire 5000 for Q1 vs the whole of 2022. The combined contributions for the technology and digital information sectors in Q1 accounted for the majority of the 7.3% for the index. This is a mirror opposite of the negative contributions they generated in 2022.
It can also be seen that the negative contribution for financials (this includes banks) was relatively small in Q1.
The tech rally trumped bank angst in Q1
Exhibit 5: The decomposition of market returns - 12months and YTD.
Source: Wilshire. Data as of March 31, 2023.
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Share buybacks in the US have been a key feature of market dynamics during the post-GFC period...
The environment of financial repression provided companies with the perfect tailwind to pursue buybacks that boost both EPS and shareholder returns. However, it appears that this secular driver has peaked and is losing momentum.
Chart 1: US (ex financials) quarterly and rolling 4Q buybacks (USD, Bn)
US buybacks (ex Financials) peaked at trailing 4-quarter rate of $1tn in Q3 last year and have eased back since. The opportunity to repurchase shares on a large scale has been rational behaviour for companies in the post-GFC landscape of extremely cheap money and rising free cashflow. However, with interest rates rising and profits declining, there will now surely be big question marks over companies' willingness to sustain buybacks at these levels.
Chart 2: US technology companies have been the dominant force behind US buybacks
Chart 2 shows the US sector buybacks as a percentage of total (ex financials) buybacks, demonstrating the dominance of the technology sector. Over the past decade technology has seen its share of buybacks rise from 20% to a peak of over 50% in mid-2021. The share of the next four biggest sectors has largely remained flat and range bound. With technology buybacks now in decline, there will be big question marks over which sectors, if any, will pick up the baton.
Chart 3: Comparing the US dividend yield with the buyback-adjusted yield
Chart 3 shows the impact on the effective yield returned to shareholders when buybacks are included. The buyback-adjusted yield rises to 4.3% (versus a 1.6% dividend yield). Compression in the adjusted yield will impact long term return projections.
Source: Wilshire and FactSet. Data as of March 13, 2023
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