On the heels of a strong opening three months to 2023, global stock markets continued to advance in the second quarter. As measured by major indexes, four countries — Greece, Hungary, Poland and Brazil — gained more than 20% in U.S. dollar denominated terms. The only other stock markets that produced better total returns than the United States on the whole were India and Colombia. 

Optimism about artificial intelligence and related technological advances helped boost equity markets around the world. So did signs of lower inflation and ebbing recessionary pressures. As a result, the second quarter wound up producing positive returns across IFA's equity indexes. Still, a detailed analysis by Dimensional Fund Advisors pointed out that Q2's outperformers were generally led by growthier fare and shares of companies trading at lower levels of profitability.

The market premium (stocks over Treasury bills) was positive, noted DFA Senior Investment Director Wes Crill. At the same time, the size, value and profitability premiums were all negative in the quarter. "Three negative premiums in a quarter, though, isn't particularly rare," he observed. ¹

In his review of Q2, Crill highlighted DFA research showing that during the past 239 quarters — dating back to July 1963 — at least three of those premiums had finished in positive territory 20.5% of the time. Also, 94.1% of the quarters had at least one negative premium over this nearly 60-year period.

"We expect positive premiums every day, but history tells us that unexpected returns tend to dominate quarterly performance," Crill added. Since premiums can turn on a dime, he warned against giving too much credence to what happens on a quarterly basis.

In fact, DFA's research found that in the 49 quarters since mid-1963 with three or more negative premiums, just one of those premiums proved negative for the subsequent 12 months. "And over the long haul, tilting towards drivers of higher expected return increases the likelihood of meeting (your) future financial goals," Crill concluded. (See graphic below.)

Domestic Equities

Domestic stocks continued to gain ground in the second quarter as all six of IFA's domestic equity indexes posted healthy returns. In particular, indexes tracking U.S. large growth and large blend stocks led the field in Q2. Small growth stocks, which historically have been laggards over longer periods, also did well in the quarter. Notably, however, value-styled stocks — both large and small caps — each posted 3%-plus returns. The Q2 performances helped to boost value's returns through the first half of 2023. Meanwhile, IFA's blended index covering U.S. small cap stocks (value and growth) was up by more than 7% at the end of June.

International Equities

International stocks in developed markets kept moving forward in Q2. The quarter's leader among major indexes was the IFA International Value Index, which returned more than 3.6%. The blended International Small Company Index and the International Small Cap Value Index both posted positive gains in Q2. For the year, international value stocks in developed non-U.S. markets were up by double digits. Notice, too, that small-cap stocks in foreign developed markets ended the first half of 2023 outpacing sister small blend and small value equities in the U.S.

Emerging Markets Equities

Like international developed markets, stocks issued by companies based in developing countries moved higher in Q2. In particular, the IFA index representing large-cap value emerging markets stocks led the way with a better than 4.6% return. Through the first-half of 2023, large value and blended small caps were up by more than 8%. Meanwhile, the blended large-cap focused IFA Emerging Markets Index headed into the second-half of the year ahead by slightly more than 7%.  

Real Estate Equities

Domestic REITs on average produced double-digit gains while international real estate markets outside the U.S. fell into negative territory in Q2, according to estimates by Dimensional Fund Advisors. Since U.S. stocks represent a majority of the world's market capitalization in real estate, the IFA Global REIT Index only slid a bit in the quarter, finishing down by 0.16%. For the year through June, however, the IFA Global REIT Index was ahead by 0.79%.   

Fixed-Income

In the second quarter, the 30-year U.S. Treasury rate increased by 0.21% to 3.85%. Meanwhile, the 10-year U.S. Treasury rate rose by 0.38% to 3.81%. Also, the five-year U.S. Treasury rate rose by 0.61% to 4.13%. 

If interest rates have increased, the price of existing bonds can generally be expected to decrease, and vice versa. 

For Q2, IFA's fixed-income benchmarks showed a fairly strong range of outcomes. For example, The IFA Short Term Government Fixed Income Index and the IFA One-Year Fixed Income Index (which holds both Treasuries and corporate bonds) each gained more than 1% in the quarter. At the other end of the Q2 spectrum, the IFA Five-Year Global Fixed Income Index rose by 0.70%.

IFA Index Portfolios

The second quarter showed how different exposures to risk impacted short-term portfolio outcomes. That's why we like to encourage investors — whether relative newbies or well-educated veterans — to engage in an ongoing conversation with an IFA wealth advisor regarding each individual's risk capacity. Besides offering an online Risk Capacity Survey, we provide to each client a complimentary and holistic financial plan. 

Below is an overview of how several IFA Index Portfolios performed in Q2 as well as over the first-half of 2023. All of these returns are shown net of the maximum annual 0.90% advisory fee through June 30, 2023.

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android.

Footnote:

1.) Dimensional Fund Advisors, Wes Crill, "Three of a Kind," June 26, 2023.

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Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.