At the beginning of 2023, the prevailing view in the market was that it would be a tough year for stocks and bonds, both because both asset classes had performed poorly in 2022 and because inflation looked out of control and the economy appeared to be heading into a recession.

Yet the market surprised investors on almost all fronts: stocks soared in 2023, interest rates levelled off and the economy remained stable.

Halfway through 2023, the markets surprised investors and economists once again this year. the hyperinflation and recession of early 2023 didn't show up, and inflation declined more rapidly during the year than most expected.
Admittedly, some economists expected inflation to fall, but most of them also expected the fall in inflation to come free of a rapid Fed-driven economic slowdown (i.e., recession). But that hasn't happened either, as employment has remained strong, home prices have so far absorbed the shock of rising mortgage rates, and the economy has continued to grow.

Compared to a year ago, economic activity has levelled off and home prices have declined slightly, but are still at high levels for the second half of 2021.

Risk capital exited the market in 2022, negatively impacting the risk asset class. in 2023, to some extent some risk capital is returning to the market, and equity markets are already benefiting, with gains more skewed towards the companies and markets that declined the most in 2022.

The chart below shows the growth in global market capitalisation (in US dollars) in the first six months of the year, and the change in market capitalisation in 2022: in US dollars, global equity market capitalisation has recovered by $8.6 trillion in the first six months of the year, but it is still $14.4 trillion below where it would have been at the start of 2022, as last year's stock market declines were too severe.

By region, the U.S. stock market has been the best performer in the first six months of 2023, increasing its market capitalisation by nearly 14% ($5.6 trillion), recovering nearly half of the losses from last year's crash.

China's stock market fell 1.01 per cent in the first six months of 2023, compared with an 18.7 per cent decline last year.The world's two best-performing regions in 2022, Africa and India, were flat in the first half of 2023.

In US dollar terms, Latin America was flat in the first half of 2023, although several Latin American markets enjoyed strong returns in local currencies, which were eroded by high inflation.

It is exchange rate movements that explain the contrast between local currency and dollar returns, as shown in the chart below, which shows the performance of the dollar against other currencies, as well as against the currencies of emerging markets, over the period 2020-23: after strengthening in 2022, the dollar weakened, albeit only moderately, against most currencies in 2023.