What segments of US stocks outperformed in 2022?
Posted on January 5, 2024

I like arranging the most recent calendar year returns in the 3 by 3 matrix of the Investment Style Box. I get a snapshot of what outperformed and what underperformed the US stock market as a whole. This post shows 2023 results: the return for stocks, ~22% real return, was about triple the ~7% long-run average return per year. Almost all the superior return came from Large Cap Growth (LCG) stocks. I hold a Total Market Index fund, and it handily beat the returns in seven of the nine boxes in the 3 by 3 matrix. I conclude the tactic is to Keep it Simple. Don’t try to tilt your portfolio overweight a sector. The winning tactic is to hold a bland, Total Market Index fund.


The Nominal return for the Total Market was 26%. This was driven by the ~47% return for Large Cap Growth stocks. Seven other boxes were well below the 26% return of a Total Market Index fund.


For perspective, the real return for stocks has been well above the expected rate of return for stocks in four of the last five years. The large negative return in 2022 was so bad – the fourth worst year in my lifetime –that the average real return rate over the last five years of 6.3% per year – is below the long-run average for stocks of 7.1% per year.



Here are three highlights:


• The real return for the total market was +22%. That’s a a good bounce from the -24% real decline of the prior year, but we need a total gain of about 32% to recover from last year.


• Large Cap Growth stocks killed every other sector; Large Cap Growth returned 37 percentage points more than Large Cap Value, for example; this is roughly the reverse from last year.


The ONLY way to match the return for the total market this year was to hold enough of Large Cap Growth stocks. If you tilted to hold less than what a Total Market index fund, you fell short of the return of a bland Total Market index fund.


• If you decided to tilt your holdings away from Large Cap Growth over longer periods of time, you would had about the same return with Large Cap Blend (basically an S&P 500 index fund), but you would have been far behind in seven of the nine boxes.


The error in that tactic could have been significant. Over ten years, four of the boxes lag the return for Total Market by an average of 25%; three others lag by roughly 15%. This tells me to NEVER try to tilt to a guess of to the boxes I might think will outperform.




The columns in the Style Box are Value, Blend, and Growth stocks and the rows are Large-Capitalization (Cap), Mid-Cap, and Small-Cap stocks. The nine boxes in the 3 by 3 matrix aren’t equal in market value of the stocks they hold. The row of Large-Cap represents about 80% of the total value of all US stocks. I use Vanguard index funds with tiny expense ratios for the returns for each box.


For reference, I’ve displayed the Style Box before: for 2017, 2018, 2019, 2020 and 2021. I also display the +26.0% return for VTSAX – the Vanguard index fund that holds ~4,000 all traded US stocks. (Patti and I hold the Total US Stock fund FSKAX, +26.1% in 2023.) You can see the dominant returns for Large Cap Growth.


== The boxes for 2023 Relative to VTSAX ==


I show the percentage point difference for 2023 in each box relative to VTSAX. This makes the point that you HAD to hold enough of Large Cap Growth to match the market. Seven of the nine boxes lagged and five of them lagged by 10% or more.



The return for Large Cap Blend (VLCAX) is almost the same as for an S&P 500 Index fund. The return for an S&P 500 index funds is going to be similar to a Total Market Index fund. It will be better when Mid and Small Cap stocks underperform and worse when they outperform. Over the last 15 years, Mid and Small Cap stocks have lagged Large Cap stocks; they wildly outperformed in other periods.


== Five years: Large Cap Growth leads ==


Over the past five years, Large Cap Growth leads all the other boxes, and leads five boxes by more than seven percentage points return per year.



== Ten years: Large Cap Growth


Over the last ten years, Large Cap Growth was the place to be. VTSAX – and other Total Market funds –outperformed seven of the nine boxes. Mid and Small Cap stocks lag.



= 15 years: Large Cap Growth ==


The picture is similar: LCG is the leader of the pack. VTSAX beats seven of the nine boxes. Mid and Small Cap Stocks lag.



== Percentage point differences compound ==


The differences in annual return rates compound to large dollar differences over time. I display the growth of $10,000 invested. Only Large Cap Growth is significantly better than the Total Market return over a decade. Seven others lag and the percentage difference in growth is significant.



One cannot predict which style will outperform in the future. One can only guess. I’m not guessing. I’m sticking with my Total Market fund.


== 2023 World stocks +22.1% =


The total world market stock index, MSCI All Cap World Index was +21.5% for 2023. US stocks are roughly 55% of the total value of all stocks in the world. Total International Stocks (VTIAX) were +15.5% in 2023. (Patti and I own the ETF of this: VXUS = 15.9% for 2023.



Conclusion: 2023 was a terrific year for US stocks following a horrible 2022. The real return was ~22%. That’s triple the long run or expected return rate for stocks. It’s an excellent bounce back from the large negative return in 2022, but we still need another very good year to get all the way back to where we were at the start of 2022.


Every year some segments of the market outperform and some underperform. In 2023, the return for Large Cap Growth stocks SWAMPED the other eight boxes in the 3 by 3 matrix that describes market returns. Large Cap Growth was better than Large Cap Value in 2023 by more than 37 percentage points. This is roughly the opposite of last year.


Over a five, ten, and 15-year history, Large Cap Growth has outperformed all other styles. It’s basically the only box that has significantly outperformed a bland Total Market fund.

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