In a year where intricate strategies and sector-specific investments faltered, the S&P 500 emerged as the undisputed champion for investors. Handpicked sectors, trendy options strategies, and dividend-focused approaches all took a back seat to the straightforward wisdom of owning the S&P 500. As 2023 draws to a close, the investment community is embracing the simplicity that comes with sticking to the benchmark index.
With a 4% rally this month propelling the index’s 2023 advance to an impressive 24%, investors are flocking to plain-vanilla stock funds. Equity ETFs have witnessed a staggering influx of nearly $69 billion in December alone, marking the best month of inflows in two years, according to Bloomberg Intelligence. The largest fund tracking the S&P 500, the $494 billion SPDR S&P 500 ETF Trust (ticker SPY), has seen over $42 billion in additional investments, poised to achieve its biggest month on record since 1998.
This surge in S&P 500 adoption underscores the enduring success of the buy-and-hold strategy, especially as the index hovers near new highs. Defensive measures and attempts at market timing have proven less effective, exposing themselves as market-timing strategies in disguise.
Art Hogan, Chief Market Strategist at B. Riley Wealth, emphasizes the value of a diversified portfolio, asserting that owning the S&P 500 is the optimal way to navigate the investment climate. Strategies based on predictions of a looming recession proved less fruitful, with Hogan stating, “If you were to start this year by saying ‘everyone says there’s a recession coming so I’m going to invest defensively,’ you got punched in the nose.”
Contrary to initial expectations of tepid returns in 2023, stocks rose steadily throughout the year, fueled by signs of a resilient economy and slowing inflation. Recent gains were further accelerated after Federal Reserve Chair Jerome Powell hinted at potential interest rate cuts next year.
Notably, even a challenging week for the S&P 500 failed to deter the influx of funds. Despite a 1.5% drop on Wednesday, the index still managed an 0.8% advance, marking its eighth consecutive week of gains, the longest streak since 2017.
As Deutsche Bank AG’s measure of aggregate equity positioning enters “overweight territory,” investors are displaying an eagerness to capitalize on the equity space. Professional money managers and retail investors alike are drawn to the market’s positive momentum, with some viewing the current situation as akin to a “melt-up.”
Equity funds have seen a substantial infusion of $349 billion in 2023, just shy of the previous year’s $398 billion. Notably, four S&P 500 ETFs have received over a third of these flows, diverting attention from sector-specific funds such as energy and utilities, which experienced outflows of $12 billion, their worst year on record.
The success of broad-market indexes concealed a challenging year for tactical investments, particularly those focused on safety. Options-linked ETFs and dividend strategies fell short of expectations, with many underperforming the S&P 500. Among them, JPMorgan’s Equity Premium Income ETF trailed the benchmark by about 17 percentage points.
In retrospect, 2023 serves as a reminder of the effectiveness of a simple and straightforward investment approach, as investors grapple with the realization that sticking to the S&P 500 would have yielded superior results.
