Finance

Advocates of industrial policy have long argued that manufacturing possesses special powers. Industry’s demands lead to technological progress; the goods it produces must pass the muster of global markets, which drives up efficiency. Some then take things further. When countries grow richer, manufacturing moves overseas as firms seek to reduce labour costs. This, they say, justifies tariffs and subsidies to protect manufacturing and boost growth. “Making things matters,” argued a recent column in the Wall Street Journal by Oren Cass, who runs American Compass, a think-tank at the vanguard of the Republican Party’s new-found protectionism.The problem is that, of late, manufacturing’s powers seem to have vanished. Figures published on October 26th show that America’s gdp jumped by 4.9% at an annualised rate in the third quarter of the year. Nearly 80% of output is now made up of services, but one might expect manufacturing at least to pull its weight, given its supposed powers. In fact, labour productivity in manufacturing fell by 0.2% at an annualised rate, meaning that the boost to growth was driven by services. To make matters worse, productivity in the manufacturing sector has been in secular decline since 2011—the first decade-long fall in the available data (see chart 1). Some economists think it is probably also the first such fall in American history.image: The EconomistWhat has prompted the reversal? Mr Cass’s favourite explanation, trade policy, can be dismissed. American manufacturing employment fell sharply in the early 2000s, in part owing to the integration of China into global trade. Some think that this “China shock”, which led to a wave of outsourcing, also caused productivity to decline by reducing the incentive for American firms to invest. Yet productivity grew until 2011. Moreover, it also subsequently declined in sub-sectors that are mostly domestic and immune to trade, including cement and concrete production.A better clue is provided by what went well in earlier decades. During the 1990s and 2000s manufacturing productivity soared, with the production of computers and electronics, especially semiconductor chips, leading the way. Gains seem to have topped out at around the time things went wrong more broadly, in the early 2010s. All told, more than a third of the overall slowdown in manufacturing since 2011 is accounted for by computers and electronics.Yet problems with computers are not the whole story. Productivity has fallen in both durable manufacturing, which includes most tech, and the non-durable sort, which includes items like cigarettes and clothes. Fourteen out of 19 manufacturing sub-sectors, from machinery to textiles, saw declines during the 2010s.Perhaps all those computers have been put to poor use. America may be a technology superpower, but when it comes to using tech in the physical world it lags behind others. It ranks seventh out of 15 countries in the adoption of robots per worker, according to the Information Technology and Innovation Foundation, a think-tank. South Korea, the world leader, uses over three times more robots per worker. And after adjusting for average wages—richer countries tend to be more advanced—America ranks 11th.But it is not clear whether there was a big change in American manufacturers’ adoption of tech, compared with other sectors, in the early 2010s. Indeed, the evidence points in the opposite direction. As Chad Syverson of the University of Chicago notes, the ratio of capital to labour has actually grown slightly faster in manufacturing than in the private sector as a whole.If investment has not plummeted, it must then be paying fewer dividends. Low-hanging fruit might have been plucked more eagerly in manufacturing. This idea is supported by the fact that industrial productivity growth has slowed across the rich world, even if not by as much as in America (see chart 2). The extra bit of American underperformance is trickier to explain. Economists throw out a boatload of hypotheses. America is known to have laxer antitrust enforcement than its peers; perhaps scrutiny was especially needed in the manufacturing sector. Maybe American manufacturing was more advanced when robots arrived on the scene, so had less to gain. Some have even argued that because America’s software and internet sectors have been so lucrative, talent has been diverted away from older industries.Could things change? Industrial-policy advocates hope that America’s subsidies for chip production and green tech will lead to a manufacturing renaissance. The idea is to boost productivity by enticing companies and investment to cluster in a given region, much as Shenzhen in China used its status as a special economic zone to become an impressive manufacturing hub. A breakthrough in robotics or artificial intelligence could push things along, just as information technology led to a surge in productivity from 1995 to 2004. For the moment, though, this is just speculation. And American manufacturing needs all the help it can get. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The Federal Reserve’s interest-rate rises are causing pain in the land of casinos: Nevadans are googling how to return their car more than folk in any other state. Yet while their pain is acute, it is not unique. Across America, the share of high-risk auto borrowers that are behind on payments by at least 60 days reached 6.1% in September, its highest in three decades (even if just a little higher than in 2019).This spells trouble for an unglamorous yet increasingly important institution: the credit union. After all, one in three Americans who borrowed to buy a car during the covid-19 pandemic did so from such an organisation. The sector is now looking at a liquidity crunch of its own, as investments struggle and regulators demand bigger buffers. America’s 4,700-odd credit unions provide members with generous deposit rates and lending terms, and are run on a not-for-profit basis—an approach that won over savers during the low-rate era. All told, they now hold deposits worth more than 10% of those in traditional banks.image: The EconomistIn response to current difficulties, credit unions have been forced to break with their business model, and have raised deposit rates more slowly than banks (see chart). Although they usually benefit from the fact that members, who tend to be associated with an institution such as a government bureaucracy or university, are patient types, that patience is now being tested. Average deposits in credit unions fell by 3.5% in the year to July, an unwelcome trend in a sector that has enjoyed near-continuous growth since the 1970s.Despite raising deposit rates slowly, credit unions are showing less restraint elsewhere. Outstanding loans grew by 12% in the year to July, and growth is not slowing. A fifth of union savings are in outfits where loans exceed deposits, up from an 80th at the start of 2021—meaning they need greater liquidity to ensure safety.Indeed, regulators are monitoring the sector’s liquidity. Just four unions went under in the first half of the year—consistent with recent trends—and in aggregate balance-sheets look healthy. There are some worrying shifts, however. Cash and cash equivalents have fallen by half as a share of assets from a high reached during the pandemic, as unions have sought to meet loan demand. Although they also face higher interest rates, co-operatives are nevertheless taking on debt: their borrowing is now equivalent to 6% of assets, up from an average of 3.5% over the past decade.This has led credit unions to seek other sources of funding, including by selling loans. Normally they trade among themselves, notes Steve Rick of TruStage, a mutual-insurance company. But such is the state of the sector that few co-operatives have the cash to buy others’ loans. Some have thus turned to the asset-backed securities market, in which they can exchange their car loans for cash upfront at the same time as offloading credit risks from their balance-sheets. Unfortunately, they can do so only on particularly bad terms.Since 2017 credit unions have raised $2.8bn in such markets, some $1.6bn of which has come in the past six months. This represents a large increase in costs, and as a consequence signals that there is little chance of better rates on deposits for members in the months to come. Like Nevada’s car-owners, many may end up simply walking away. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

For the past month, American diplomats have been trying to stop the Middle East from falling apart. Ever since Hamas attacked Israel and Israel retaliated, they have lobbied Jerusalem to allow aid into Gaza, shuttled between Gulf capitals to meet Arab leaders and stopped off in Amman and Cairo to ask Israel’s neighbours to help with refugees and the injured. Antony Blinken, America’s secretary of state, is looking a little tired.A regional war has so far been avoided. But otherwise American policymakers have frustratingly little to show for their many flights. Few people have made it out of Gaza, insufficient supplies of food and medicine have made it in and countries in the region remain reluctant to discuss how the war might come to end, especially what could come after Hamas. Following his second tour of the region, which finished on November 5th, Mr Blinken stressed that “all of this is a work in progress”.America’s economic might has been a cornerstone of its diplomacy for decades. At the start of the war, the hope was that financial rewards might persuade Egypt to accommodate Gazan refugees and squeeze more co-operation from Jordan and Lebanon. All three countries are teetering on the edge of financial ruin—they need help. The problem is that Washington no longer has the tools required to compensate governments; certainly not for things that risk upsetting their own people, such as being seen to abandon the Palestinians’ cause by softening to Israel or taking refugees.Over recent decades, American diplomacy in the Middle East has changed. The superpower used to be accused of being too hard-nosed and seeking to control other governments via imf programmes. Since then, imf bail-outs have become more common, and they arrive with fewer strings attached. American loans have turned into aid worth billions of dollars. In 1991 America and its allies held half of Egypt’s external debt; today Washington holds none. Before the war, the country’s officials preferred to talk about poverty reduction rather than geopolitical favours.Behind America’s shift was the hope that prosperity would stabilise allies, such as Jordan’s monarchy and Egypt’s dictatorships, and improve its own reputation, which had been battered by wars in Afghanistan and Iraq. Yet little economic growth has materialised. The Middle East is home to some of the world’s most troubled economies. Lebanon has fallen over the edge: the government defaulted on its debts in 2020, and lacks the political stability required to negotiate with creditors. Inflation is now raging at more than 100%.Others are doing little better. Unemployment in Jordan is higher than at any point in the past 25 years, except for during the covid-19 pandemic, and the state relies on support from America and the imf to escape default. Similarly, Egypt has been flirting with default since a foreign-currency crunch last year. Three separate imf bail-outs in the past decade have stalled owing to the country’s refusal to dismantle loss-making firms run by the armed forces.Marching ordersThis bleak picture is a problem for America, and not only because it represents a failure of its aid policies. The country would once have been able to forgive debts in return for favours, as it did in 1991 in thanks for Egypt’s involvement in the Gulf war. In 1994, when Jordan was negotiating a peace treaty with Israel, King Hussein’s first ask of President Bill Clinton was to forgive debts. Now there is no lending for America to forgive. Moreover, the few American investors and firms left in Egypt and Lebanon packed up at the onset of financial turmoil. Thus there is little that officials can do by influencing business, too.Another option would be for America to offer a truly enormous amount of aid as its side of a grand bargain. Inevitably, however, such a package would face fearsome political opposition in Washington. Meanwhile, any attempt to induce co-operation by threatening to pull the plug on aid to Egypt and Jordan would not be credible. In Egypt, most of America’s money goes to the army, making it too important to play games with given the security situation. In Jordan, more cash goes directly into the government’s budget, but this is widely seen as compensation for the hundreds of thousands of Palestinian and Syrian refugees that the country shelters. Policymakers in both places believe they are entitled to their grants as fair payment for keeping the peace with Israel and a grip on their populations. “We take the grants because they keep things balanced,” says one. “[Americans] I speak to know this.”What Lebanon gets from America is now mostly humanitarian aid, which came to $92m in the year to June. Such funds bypass government coffers and go straight to the population, meaning that they offer little financial leverage—and the country’s government is so fragile it is not in a position to bargain. Hizbullah, a militia-cum-social-movement, controls swathes of the country, has its own bank and has amassed tens of thousands of troops, which are firing rockets into Israel. Since America lists the group as a terrorist organisation, officials can hardly offer it economic goodies.Without ways to entice allies into good behaviour, America’s financial diplomats must occupy themselves with punishing bad behaviour. America now enforces ten times as many sanctions globally it did two decades ago. Since October 7th its Treasury department has slapped on two rounds of restrictions covering everything from the Iranian state to Turkish construction companies. Unfortunately, Gaza’s most pressing problems, such as the provision of humanitarian aid and safety for refugees, cannot be solved by sanctions, and Hamas’s finances are sufficiently opaque as to be resistant to American measures. Many of the organisation’s financiers find a haven in Turkey—a country whose president, Recep Tayyip Erdogan, is reported to have refused Mr Blinken’s request for a meeting during his recent travels. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Think of America’s stockmarket. What is the first firm that springs to mind? Perhaps it is one that made you money, or maybe one whose shares you are considering buying. If not, chances are you are thinking of one of the big hitters—and they don’t come much bigger than the “magnificent seven”.Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla are Wall Street’s superstars, and deservedly so. Each was established in the past 50 years, and five of them in the past 30. Each has seen its market value exceed $1trn (although those of Meta and Tesla have since fallen, to $800bn and $700bn respectively). Thanks to this dynamism, it is little wonder that America’s stockmarket has raced ahead of others. Those in Europe have never produced a $1trn company and—in the past three decades—have failed to spawn one worth even a tenth as much. Hardly surprising that the average annual return of America’s benchmark S&P 500 index in the past decade has been one-and-a-half times that of Europe’s Stoxx 600.There is just one problem with this story. It is the hand-waving with which your columnist cast the magnificent seven as being somehow emblematic of America’s entire stockmarket. This conflation is made easily and often. It is partly justified by the huge chunk of the S&P 500 that the magnificent seven now comprise: measured by market value, they account for 29% of the index, and hence of its performance. Yet they are still just seven firms out of 500. And the remaining 98.6% of companies, it turns out, are not well characterised by seven tech prodigies that have moved fast, broken things and conquered the world in a matter of decades. Here, then, is your guide to the S&P 493.Most obviously, having discarded the tech behemoths, our new index now looks substantially older. Consider its biggest companies. At the top of the list is Berkshire Hathaway, an investment firm led by two nonagenarians, and Eli Lilley, a pharmaceuticals-maker established in the 19th century by a veteran of America’s civil war. Further down is JPMorgan Chase, a bank that made its name before the founding of the Federal Reserve. That is not to suggest that these firms do not innovate. All of them, by definition, have remained highly successful, even if none has crossed the $1trn threshold. Whippersnappers, though, they are not.image: The EconomistAs a result of this maturity, the S&P 493 is less susceptible to the market’s ever-changing mood (see chart). This is a double-edged sword. On the plus side, it offered protection during the crash of 2022. The more established business models of S&P 493 companies started the year with less hype than those of the magnificent seven, leaving them less vulnerable when the hype duly evaporated. Meanwhile, a smaller proportion of their value came from the promise of distant future earnings—where present value fell dramatically as interest-rate expectations soared. The net effect was that, while the magnificent seven together lost 41% of their value, the S&P 493 lost just 12%.This year, however, the tables have turned. On the face of it, the old-timers ought to have done well, since the American economy has remained remarkably buoyant. This, combined with enthusiasm concerning the potential of artificial intelligence to juice their profits, led to a stellar recovery for the magnificent seven. In the first ten months of the year their share prices rose by 52%, nearly erasing the losses of 2022. By contrast, the value of the S&P 493 fell by 2%.What to make of this bifurcation? One conclusion is that America’s tech giants have become overvalued and must eventually face a crash. Another is that, just as share prices have diverged, so too will the companies’ sales and profits, meaning that the magnificent seven really are about to leave the dinosaurs in the dust. Investors seem to choose between these hypotheses largely according to their own temperament, since traditional valuation measures such as the price-to-earnings ratio, which for the magnificent seven is roughly double that for the S&P 493, lend support to both camps.A third conclusion, now aired increasingly often, is that the S&P 500’s domination by seven stocks which are so different from the rest means it is no longer a good benchmark. That is not quite right. Many people invest in funds tracking the index precisely so they can capture the gains of the winners without having to care about its composition. Still, if you want to know what America’s stockmarket really looks like, avoid the headline index. Look at the S&P 493. ■ More

At first glance, Argentina faces a stark choice in the second round of its presidential election on November 19th. Sergio Massa, the current finance minister whose government is presiding over inflation of 138% and a bizarre system of various official exchange rates, is facing Javier Milei. Mr Milei is a libertarian who says he wants to tear down the system, borrowing ideas from Friedrich Hayek, Milton Friedman and other free-market economists.Yet whoever wins, reformist Argentines doubt the country will truly change. In all likelihood, Mr Massa would double down on money-printing; he has little interest in dismantling the system of patronage that makes sustained growth impossible. Mr Milei, by contrast, would have little support in Congress. He has no experience of implementing policy. Many of the market-oriented economists sympathetic to Mr Milei, and even those who advise him, have surprisingly vague ideas about what Argentina needs to do to improve its economy. The country feels stuck.image: The EconomistArgentina is an extreme example of a wider trend. The world has forgotten how to reform. We analysed data from the Fraser Institute, a free-market think-tank, which measures “economic freedom” on a ten-point scale. We defined “daredevil economics” as when a country improves by 1.5 points or more—a quarter of the gap between Switzerland and Venezuela—within a decade, therefore indicating that liberalising reforms have been undertaken. In the 1980s and 1990s this was common, as countries formerly in the Soviet Union opened up, and many deemed unreformable, such as Ghana and Peru, proved they were in fact reformable (see chart 1). Politicians changed foreign-trade rules, fortified central banks, cut budget deficits and sold state-owned firms.In recent years just a handful of countries, including Greece and Ukraine, have implemented reforms. And in the decade to 2020 only two countries, Myanmar and Iraq, improved by more than 1.5 points. The same year a paper by economists at Georgetown and Harvard universities, as well as the imf, looked at structural reforms, and found similar results. In the 1980s and 1990s politicians across the world implemented lots. By the 2010s reforms had ground to a halt.Daredevil economics has declined in popularity in part because there is less need for it. Although in recent years economies have become less liberal, the average one today is 30% freer than it was in 1980, according to our analysis of the Fraser Institute’s data. There are fewer state-run companies. Tariffs are lower. Even in Argentina, telecoms and consumer-facing industries are better than they once were.But the decline of daredevil economics also reflects a widely held belief that liberalisation failed. In the popular imagination, terms such as “structural-adjustment plan” or “shock therapy” conjure up images of impoverishment in Africa, the creation of mafia states in Russia and Ukraine, and human-rights abuses in Chile. Books such as Joseph Stiglitz’s “Globalisation and its Discontents”, published in 2002, and Naomi Klein’s “The Shock Doctrine”, in 2007, fomented opposition to the free-market “Washington consensus”. In Latin America “neoliberal” is now a term of abuse; elsewhere, it is rarely used as an endorsement. Many Argentines argue that the country’s attempts to liberalise its economy in the 1990s provoked an enormous financial crisis in 2001.Today, international organisations like the imf and the World Bank are rather less interested in daredevil economics than they once were. In an edition of its “World Economic Outlook” published in October 1993, the imf mentioned the word “reform” 139 times. In its latest edition, published exactly 30 years later, the word appears a mere 35 times. These days America has a new consensus, which takes a sceptical view of globalisation’s benefits, prioritises domestic interests over international ones and favours large-scale subsidies in order to speed up the green transition and bring home manufacturing. With less chivvying from the West, governments elsewhere feel less pressure to reform their own economies. Argentina’s free-marketeers in the 1990s drew on deep links with America. Fewer such connections exist today.In for a shockYet the view that daredevil economics failed does not stand up to scrutiny, even if projects often produced short-term pain. In the 1990s the three Baltic countries liberalised prices and labour markets. This allowed them to move from membership of the Soviet Union to membership of the euro within 25 years (see chart 2). In the 2010s Greece implemented many reforms demanded by the imf and European authorities. Inward foreign direct investment is now soaring, and this year Greece’s gdp is expected to grow by about 2.5%—one of the strongest rates in Europe. Not long ago many argued that China had rejected daredevil economics and succeeded. Recent economic weakness, including a property market in turmoil under President Xi Jinping, casts doubt on this notion.Indeed, a growing body of research suggests that daredevil economics has largely achieved its aims. A paper by Antoni Estevadeordal of the Georgetown Americas Institute and Alan Taylor of the University of California, Davis studies the effect of liberalising tariffs on imported capital and intermediate goods from the 1970s to the 2000s, finding that the policy raises gdp growth by about one percentage point. Ten years after the beginning of a “reform wave”, gdp per person is roughly six percentage points higher than could have reasonably been expected otherwise, according to a paper published in 2017 by economists at the European Central Bank, which analysed 22 countries of different income levels from 1961 to 2000.Meanwhile, a paper published in 2021 by Anusha Chari of the University of North Carolina, Chapel Hill and Peter Blair Henry and Hector Reyes of Stanford University finds positive impacts from a wide variety of reforms in emerging markets, from stabilising high inflation to opening capital markets. For instance, trade liberalisation tends to raise the average growth rate of gdp over a decade by more than 2.5 percentage points a year. In another paper, focusing on Latin America, Ilan Goldfajn, president of the Inter-American Development Bank, and colleagues acknowledge that growth has been disappointing, but contend that “without some subset of the Washington consensus policies, it would have been difficult, if not impossible, to achieve macroeconomic stability and to recover access to foreign financing in the late 1980s and early 1990s.” Other research has found faster growth in Africa since 2000 among reforming countries.In most places where reforms appear to fail, the problem has been lack of commitment. Take Ukraine, where even before covid-19 and Russia’s invasion gdp per person was lower than when the Soviet Union collapsed. By the early 1990s it was clear that the government was not taking daredevil economics seriously. A memo written for the World Bank in 1993 by Simon Johnson and Oleg Ustenko, two economists, noted that “only a tougher and more radical set of policies can avert hyperinflation, but no political leader seems willing to adopt these measures.” What brought Argentina down in 2001 was not daredevil economics, as is commonly assumed. It was persistently large budget deficits.Perhaps Mr Milei will prove his doubters wrong. Perhaps he will win the election and then implement sensible economic reforms. This would include liberalising trade and making it easier for Argentina’s bosses to hire and fire. Doing so would help the country enormously. It would also demonstrate to the rest of the world a path forward. Daredevil economics may be disruptive, but it pays off. ■ More

Often one of the central bank’s bigger proponents for tighter monetary policy, Mester, 65, will reach mandatory retirement as she will have served in her current position for 10 years come June of next year.
The vacancy comes at a time when the Fed has pushed for greater diversity among its governing body.

The Cleveland Federal Reserve launched a search Wednesday for its new leader, after current President Loretta Mester retires in mid-2024.
Often one of the central bank’s bigger proponents for tighter monetary policy, Mester, 65, will reach mandatory retirement as she will have served in her current position for 10 years come June of next year.

A committee comprised of Cleveland Fed board members will conduct the search. The vacancy comes at a time when the Fed has pushed for greater diversity among its governing body.
Heidi Gartland, deputy chair of the district’s board, will lead the effort to replace Mester.
“President Mester’s strong leadership over the past decade has positioned the Cleveland Fed as an important resource to the community and the nation,” Gartland said. “We are committed to finding a new leader who can ensure the Bank continues to meet the high standard that President Mester has set.”
Whomever leads the Cleveland Fed will get a vote in 2024 on the central bank’s rate-setting Federal Open Market Committee.
In her most recent speech, Mester said she thinks the Fed may need another interest rate hike before the end of the year as it seeks to get the inflation rate back to 2%.

Don’t miss these stories from CNBC PRO: More

HSBC on Wednesday said it is launching custody services for the safe storage of tokenized securities, digital assets that represent regulated securities like bonds.
The bank is the latest institution to embrace digital asset custody, after U.S. banking giant BNY Mellon announced a similar move in 2021.
HSBC is “seeing increasing demand for custody and fund administration of digital assets from asset managers and asset owners, as this market continues to evolve.”

HSBC is the largest bank in Europe by total assets.
Nicolas Economou | Nurphoto | Getty Images

HSBC on Wednesday announced it will offer custody services for tokenized securities, making the British bank the latest major institution to embrace digital assets.
HSBC is using technology from Swiss crypto custody firm Metaco, which was recently acquired by blockchain startup Ripple, to store bonds and other securities.

In a press release, the bank said that the service would complement its HSBC Orion platform for issuing digital assets, as well as a recently-launched offering for tokenized physical gold.
HSBC will use Harmonize, Metaco’s platform for institutions, which “helps unify security and management of digital asset operations,” according to the press release.
HSBC is the latest institution to embrace digital asset custody, after U.S. banking giant BNY Mellon announced a similar move in 2021.
Tokenized securities are effectively regulated assets, like bonds and equities, in the form of tokens issued on a blockchain.
In turn, a blockchain can be considered a shared ledger on which assets are recorded digitally. The technology served as the foundation upon which bitcoin was built, but its applications in the banking world are very different to those of bitcoin and other cryptocurrencies.

In the case of banks, these institutions are leveraging blockchain for payments, trading, and other purposes, often without a digital token being involved. Banks are finding utility in tokens by digitizing equities, bonds and other assets.
HSBC is “seeing increasing demand for custody and fund administration of digital assets from asset managers and asset owners, as this market continues to evolve,” Zhu Kuang Lee, chief digital, data and innovation officer for securities services at HSBC, said in a statement.
Metaco CEO Adrien Treccani told CNBC via email that the partnership reinforces “continued momentum working with top tier financial institutions.”
“Financial institutions are ready to scale digital assets pilots to real use cases around custody, issuance, trading and settlement of tokenized assets, and in so doing, unlocking economic benefits and new revenue streams.”
It marks another step from HSBC toward embracing digital assets. The bank, which holds about $3 trillion in assets globally, already lets its Hong Kong clients trade in bitcoin and ether exchange-traded funds. More

Visitors around the Charging Bull statue near the New York Stock Exchange, June 29, 2023.
Victor J. Blue | Bloomberg | Getty Images

The S&P 500 is up 14% this year, but just eight days that explain most of the gains. 
If you want a simple indication of why market timing is not an effective investment strategy, take a look at the data on the S&P 500 year to date.  

Nicholas Colas at DataTrek notes that there have only been 11 more up days than down days this year (113 up, 102 down) and yet the S&P 500 is higher by 14% year to date. 
How to explain that the S&P is up 14% but the number of up days is about the same as the down days?  Just saying “there’s been a rally in big cap tech” does not quite do justice to what has been happening. 
Colas notes there are eight days that can explain the majority of the gains, all of them related to the biggest stories of the year: big tech, the banking crisis, interest rates/Federal Reserve, and avoiding recession: 
S&P 500: biggest gains this year

January 6         +2.3%  (weak jobs report)
April 27           +2.0%  (META/Facebook shares rally on better than expected earnings)
January 20      +1.9%   (Netflix posts better than expected Q4 sub growth, big tech rallies)
November 2    +1.9%  (10 year Treasury yields decline after Fed meeting)
May 5              +1.8%   (Apple earnings strong, banks rally on JP Morgan upgrade)
March 16         +1.8%  (consortium of large banks placed deposits at First Republic)
March 14          +1.6%  (bank regulators offered deposit guarantees at SVB and Signature Bank)
March 3             +1.6%  (10-year Treasury yields drop below 4%)

Source: DataTrek

The good news: those big issues (big cap tech, interest rates, avoiding recession) “remain relevant now and are the most likely catalysts for a further U.S. equity rally,” Colas says. 
The bad news: had you not been in the markets on those eight days, your returns would be considerably worse. 
Why market timing does not work 
Colas is illustrating a problem that has been known to stock researchers for decades: market timing — the idea that you can predict the future direction of stock prices, and act accordingly — is not a successful investing strategy. 
Here, Colas is implying that had an investor not been in the market on those eight best days, returns would have been very different. 
This is not only true for 2023: it is true for every year. 
In theory, putting money into the market when prices are down, then selling when they are higher, then buying when they are low again, in an infinite loop, is the perfect way to own stocks. 
The problem is, no one has consistently been able to identify market tops and bottoms, and the cost of not being in the market on the most important days is devastating to a long-term portfolio. 
I devote a chapter in my book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange,” to why market timing doesn’t work. 
Here’s a hypothetical example of an investment in the S&P 500 over 50 years.
Hypothetical growth of $1,000 invested in the S&P 500 in 1970
(through August 2019)

Total return                                 $138,908
Minus the best performing day $124,491
Minus the best 5 days                $90,171
Minus the best 15 days             $52,246
Minus the best 25 days             $32,763

Source: Dimensional Funds 
These are amazing statistics. Missing just one day — the best day — in the last 50 years means you are making more than $14,000 less. That is 10% less money — for not being in the market on one day. 
Miss the best 15 days, and you have 35% less money. 
You can show this with virtually any year, or any time period. This of course works in reverse: not being in the market on the worst days would have made returns higher. 
But no one knows when those days will occur. 
Why is it so difficult to time the market? Because you must be right twice: you must be right going in, and going out.  The probability you will be able to make both decisions and beat the market is very small. 
This is why indexing and staying with the markets has been slowly gaining adherents for the past 50 years. The key to investing is not market timing: it is consistent investing, and understanding your own risk tolerance. More