Oct 2023 Market Update / Market Vol

Dear clients and friends,

As we enter the last quarter of the year, volatility is picking up in both the stock and bond markets, primarily due to rising treasury yields and renewed concern about higher for longer rates of inflation and soaring national debt. 

Historically, September is a difficult month for the stock market and that proved true in 2023. The S&P 500 and Nasdaq both dropped -5%, the Dow Jones -4%, and the Russell 2000 -8%. With the Fed raising rates again and signaling another on the table still this year, the yield on 10-year treasury bonds increased 12+% over the last month to roughly 4.67%, as of this writing. This bond yield is what’s often referred to as the risk-free rate and what many equity analysts use in their Capital Asset Pricing Model for determining expected rates of return. 

So typically an increase in the 10-year treasury yield is inversely correlated with stock valuations. The reverse tends to hold when yields decrease. While these short-term moves can produce anxiety, they are completely normal as shown in the following image. 

The image above details the history of market corrections in both the S&P 500 and the Dow Jones going back to 1942 through June of this year. What you can see is a -5% decline or more happens about 3 times per year and a -10% decline about every 16 months. So far in 2023, the largest decline in the S&P this year is about 8%, when some of the banking shocks happened back in March. So while the last month may have felt choppy, it’s very much in line with market norms historically. The next image is one of my favorites and highlights the duration of up markets (Bull) vs. down markets (Bear).

As you can see, the average bull market lasts 4.2 years with a cumulative return of 147.5%, and the average bear market is much shorter at 11.1 months and a cumulative loss of -31.7%. This equates to the stock market going up roughly 80% of the time. We can’t know for sure, but it appears to us that in spite of the headwinds that will cause downside volatility, we are in the early stages of the next bull market in both stocks and bonds.

We look forward to seeing you all and reviewing your portfolios over the next few months and thank you all for the continued trust as we move into the last quarter of 2023.

All the best,

Stephen, Dan, and Chris

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