Used cars and selling lumber: what we learnt from markets in 2023

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Twelve months ago, few would have backed a debt-laden used-car sales platform and a building supplies group to be among the standout performers on the US stock market.

But those are only two of the surprises in a year that also saw chipmaker Nvidia become arguably a haven trade and equities slavishly follow bond yields. Such moves were just some of the examples of how initial assumptions didn’t always make for the best bets in 2023.

In terms of sectors, homebuilders’ success was the one most didn’t see coming. Rising rates were expected to lower house prices but instead they effectively trapped US homeowners reluctant to give up their low 30-year fixed-rate mortgages — something that last happened too long ago for most to remember.

The resulting supply shortage squeezed prices to new records and developers couldn’t build fast enough. Even Warren Buffett bought in, but it was a supplier that actually did best. Builders FirstSource rose more than 150 per cent, joining the S&P 500 in December, where its gains rank it in the top five performers for the year. The simplest takeaway is the oldest one: when you first see a gold rush, buy shovels. 

Elsewhere, used-car platform Carvana soared more than 1,000 per cent, providing a reminder that painstaking stockpicking can still make a difference. Going into the year its valuation appeared to be another pandemic boom-to-bust story, with a market value that had shrivelled to about $1bn from a peak above $50bn.

Rising interest rates worried creditors including Apollo. Yet Carvana’s founders managed a debt restructuring that kept their backers on board and by September they produced a quarterly net profit for only the second time. A booming economy certainly helped — fellow platform provider Car Gurus gained almost 70 per cent — but this was one where close attention to developments would have helped to pick the real bargain on the lot.

More generally, interest rates were the big swing factor in 2023, as rate rise fears first grew, then receded in the March banking turmoil, then returned in the summer before fading in the last two months. Through it all the biggest head-scratcher was seeing stocks track bond prices and thus move inversely to bond yields. That upended a decades-long pattern of the relationship between the two.

“When you’re not worrying about inflation, rising yields signal better growth and that’s great for equities. In inflationary periods, they’re often a sign of reigniting inflation, and that’s negative,” says Liz Ann Sonders, chief investment strategist at Charles Schwab. “In 2023 the bond market basically jumped into the driver’s seat for the equity market. That’s one of the most important things that occurred this year.”

Should that shift last, investors will have to think carefully about what bond yields are really saying. The slide in 10-year yields from 5 per cent in October to below 4 per cent now has spurred a rally of around 16 per cent in the S&P 500. But are lower yields signalling easier financial conditions that will buoy economic activity and corporate earnings, or should they be read as an expectation that bond investors expect growth to slow markedly?

Otherwise, no look at 2023 can skip the Magnificent Seven tech stocks which account for more than half of the S&P 500’s gains this year. In early summer, they were even more dominant, accounting for all of the index’s gains. If there’s a lesson in the preference for Apple, Microsoft, Google parent Alphabet, Amazon, Facebook parent Meta, Tesla and Nvidia, perhaps it is to ask what drove it initially.

It was after March that their dominance started to grow and late in May that Nvidia’s strong earnings kicked off the growth-focused search for stocks with links to artificial intelligence. Tech investing is about growth stocks and exciting themes such as AI act as spurs. But the Magnificent Seven could also be seen as something of a safety play — that is, they were big companies that weren’t reliant on struggling banks or wobbly capital markets.

Sometimes it’s too simple to bundle companies into the growth or the value bucket. Viewing these as a haven could have helped value-focused investors see past the early eye-watering valuations and potentially join the rally. “I don’t believe in chasing extremely expensive stocks and I’m still not sure that the behaviour of the group is indicative of the companies’ fundamentals,” says JonesTrading’s Michael O’Rourke, the strategist who first coined the term Magnificent Seven.

“I think everyone has to be a little humbled here,” he added. “Even the strategists and investors who expected the S&P to be up, did they expect it to be so driven by seven names?” If there’s one thing to take from 2023, it must be to beware the easy assumptions.

jennifer.hughes