If there’s one chart that sums up the financial markets in 2023, this one should do it.

Thanks to the mania surrounding artificial intelligence and the stocks that could benefit most from it, tech stocks are booming this year. Not all of them mind you, but tech is clearly leading the equity market this year.

There are a couple of things that we can immediately conclude looking at this chart.

  • The is outperforming the index by more than 10% – The gap between the two comparable indices is even wider and the best indicator that this is very much a mega-cap driven market. Market breadth throughout the year has actually been pretty average suggesting U.S. stocks are much weaker than the headline averages would indicate.

  • Tech has been steadily rising and outperforming – One of the tailwinds for equities this year has been the lack of volatility. The has only touched 20 twice since mid-March. It hasn’t closed a trading day at 27 or higher since October of last year. This is exactly the kind of market environment that sucked investors in back in 2017 right before Volmaggedon blew things up in February 2018. That’s not to say that a similar event is imminent, but investors do seem to be awfully complacent about market risk right now.

  • Treasuries got all of their 2023 gains in January and have been flat since – Treasuries looked like they were setting up to be one of the better trades of 2023 with inflation coming down and the Fed ending its rate hiking cycle. These conditions have taken longer to develop than originally anticipated and that’s put a cap on the gains in safe-haven trades.

While the large-cap averages are ripping right now, it’s important to remember that the market isn’t the economy. Granted, GDP growth remains positive, the labor market is still surprisingly strong and the resilience of the U.S. economy has lasted longer than expected. The overall macro picture, however, still points towards a likely recession within the next 12 months. The housing market is still sluggish (despite a recent uptick in the data, which I don’t suspect will stick), manufacturing is struggling, China is struggling, credit is tightening, the Fed is winding down its balance sheet and the majority of the interest rate hikes already enacted by the Fed haven’t had time to really filter into the economy yet. In short, conditions are likely to get tighter and worse for both consumers and businesses and that’s before we even consider the fact that core inflation is sticky and persistent.

When the bond market corrected in 2022, investors may have assumed that it took a lot of the risk out of the market. In reality, it only corrected one of the two major components of bond market risk. Last year’s declines had nothing to do with credit risk. It was entirely about duration risk and resetting the to adjust for inflation. You can see this dynamic pretty clearly when looking at high yield spreads.

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