Smaller stocks that tumbled in 2022 have also burst out of the gate: a Goldman Sachs basket of unprofitable tech stocks that tumbled over 60% in 2022 has rebounded 21% in 2023, dwarfing the S&P 500′s 6.5% gain.
While it’s not unusual to see a reversal of trends to begin a year, “the extent to which it’s occurred is pretty dramatic,” said Walter Todd, chief investment officer at Greenwood Capital. “It certainly can’t continue at the extremes it has been.” Moderating bond yields, which surged in 2022 as the Fed raised interest rates to fight soaring inflation, bolstered the case for scooping up last year’s losers. The yield on the benchmark 10-year U.S. Treasury note fell about 40 basis points during the first few weeks of the year to 3.4% at the start of February after reaching 15-year highs last year.
Yields have headed higher again in recent days, however, as investors raised estimates for how high the Fed will lift rates and how long the central bank will keep them at peak levels. That’s weighed on stocks in the latest week, which saw the S&P 500 lose 1.1% after two straight weeks of gains. David Kotok, chief investment officer at Cumberland Advisors, is skeptical of the latest rally and some of the stocks leading the current run. His firm is underweight many of the big tech and growth stocks that have rebounded in 2023, preferring healthcare and defense shares and keeping a big allocation in cash.