Market Updates

What to make of the recent market fluctuations?

The ebb and flow of stock and bond prices (volatility) is a normal part of investing. In most calendar years, we see significant intra-year drops: for stocks, on average, the intra-year drop is about 14%, and for bonds, about 3.5%. Yet most years still end in positive territory for stocks and bonds.

A key principle of successful investing: keep market volatility in perspective. This means not just focusing on recent performance, but on your broader goals and objectives, and on the long-term investment returns of your portfolio.

-RK

The financial markets entered a summer slump in August.

The US government debt rating downgrade by Fitch Ratings was the initial catalyst for higher Treasury yields (and lower prices) early in the month. Minutes from the Federal Reserve’s July meeting, where interest rate policy is set, were released in mid-August and supported the narrative that central bank officials won’t be in a rush to bring rates down any time soon.

Market participants’ interpretation of the Fed’s interest rate policy kept the pressure on bond yields and hurt returns.

For August, the Bloomberg US Aggregate Bond Index fell by 0.63%. Through the end of August, the US bond market return year-to-date was still positive at 1.6%.

Higher bond yields took some of the summer heat out of stocks. For the month of August, the S&P 500 index of large company US stocks fell by 1.63%. Foreign stocks sold off by 3.9%.

Year-to-date, though, stocks are still significantly in the black. US stocks gained 18.7% and foreign stocks were up by 10.9% as of August 31.

Below is a summary of August returns.

RK

Stock market heat stayed high in July. Better-than-expected economic growth, declining inflation, and receding recession fears were supportive of the “new bull” which began last month.

For the month of July, the S&P 500 index of large company US stocks rose by 3.3%. Foreign stocks climbed by 2.7%. Year-to-date as of July 31, US stocks gained 20.6% and foreign stocks were up by 12.6%

However, stronger-than-expected economic growth, along with the possibility of interest rates needing to stay higher for longer to cool inflation, put downward pressure on the bond markets.

The Bloomberg US Aggregate Bond Index fell slightly last month (less than 0.1%). Through the end of July, the bond market return year-to-date was 2.25%.

Below is a summary of July returns.

RK

Sheepishly, a bull emerged in June.

While investors’ worrying about the next economic downturn may give the National Pastime a run for its money, so far this year falling stock markets have proven to be “so 2022”.

A bull market occurs when a stock index rises more than 20% from its most recent low. For US stocks, the recent low point occurred in October. The recovery, which continued during the second quarter of 2023, means US large-company stocks have attained bull status.

For many investors, the mood may feel more cautiously optimistic than wildly celebratory.

Significant ground has been regained, with US large-company stocks up nearly 17% this year. Even so, stocks are still lower today than when compared to the all-time peak in early January 2022, due to the 18% downdraft experienced last year.

Bonds are also in the black in 2023, but the previous three months proved more challenging, as interest rates moved higher (and bond prices declined). The Bloomberg US Aggregate Bond Index fell by 0.94% in the quarter ended June 30. Year-to-date, bonds returned 2.25%.

Here’s a quarterly stock and bond returns recap, going back to the beginning of 2022.

RK

Financial market momentum stalled as the threat of a default on US government obligations intensified in May.

An agreement by Congressional leaders and the President to raise the debt ceiling until 2025 addressed default risk, allowing market participants to breathe easier at the end of May.

For the month of May, the S&P 500 index of large company US stocks rose by 0.5%. Foreign stocks had a tougher go and declined by 4%. Year-to-date as of May 31, US stocks gained 9.7% and foreign stocks were up by 7.7%

Bonds lost some ground as interest rates rose. The Bloomberg US Aggregate Bond Index fell by 1.1% last month. Through the end of May, bonds returned 2.6%.

Below is a summary of May returns.

RK

Despite April showers, the financial markets maintained their sunny outlook.

For the month of April, the S&P 500 index of large company US stocks rose by 1.6%. Foreign stocks climbed higher still, up by 2.9%, helped by a US dollar that weakened against other major currencies. Year-to-date as of April 30, US stocks gained 9.2% and foreign stocks were up by 12.2%

Bonds rose along with stocks. The Bloomberg US Aggregate Bond Index rose by 0.6% last month. Through the end of April, the bond market rally in 2023 translated to a gain of 4.2%.

Below is a summary of April returns.

RK

Despite recent problems in the banking sector, stocks started the year on a strong note.

The US benchmark S&P 500 gained 7.5% in the first quarter of 2023. Foreign stocks also climbed, with the EAFE Index (Europe, Australasia and the Far East) up 9%. Technology stocks had a stellar quarter, rising by nearly 21%. Bank stocks were on the other end of the spectrum, falling by more than 17%.

And bonds participated in the rally, too. A near half-of-one-percentage-point drop in intermediate-term interest rates—despite short-term rate increases by the Federal Reserve in January and March—translated to a gain of 3.2% for the Bloomberg Aggregate Bond Index, a key gauge of the US bond market.

Here’s a recap of stock and bond performance by quarter, going back to the beginning of last year.

RK

The interest rate tail wagged the stock market dog in February. The prospect of still-higher short- and long-term interest rates rattled the stock market.

The 10-Year Treasury bond touched its 2023 low point in yield of 3.39% on February 1, but climbed during the rest of the month and ended at 3.92%. The yield climb translated to a US bond market decline of 2.9% for the month.

By the end of February, intermediate-term bonds had given back most of their January gains.

Concerns about inflation being stickier for longer and rising bond yields weighed on stocks. By the end of the month, the S&P 500 had fallen from its high point of a 9% year-to-date gain in early February back down to a 3.5% year-to-date advance. For the month of February, US stocks slid by about 2.5%.

Below is a summary of February returns.

RK

Punxsutawney Phil, the bushy Pennsylvanian, predicted six more weeks of winter cold by seeing his shadow on February 2 – and right on cue, New England fell into a deep freeze.

The financial markets, however, have been feeling quite summery. In January, bonds became a bit steamy, stocks were sultry, and some parts of the tech sector were a-sizzle.

For the month of January, the S&P 500 index of large company US stocks rose by 6.3%. Foreign stocks climbed even higher, up by 9.0%. The technology-heavy Nasdaq index advanced by 10.6%.

Bonds rose along with stocks. The Bloomberg US Aggregate Bond Index rose by 3.3% last month. 

Below is a summary of January returns.

The S&P 500 Index of US large company stocks entered a bear market (defined as a drop of 20% or more from a recent high) in the second quarter of 2022 and then began to climb out of bear territory in the fourth quarter of last year.

The bond market registered its worst year-to-date performance on record by the third quarter of 2022, then showed signs of recovery in the final quarter of the year.

Even though there was improvement in the final months of last year, this was cold comfort to investors. By any standards, 2022 was terrible for the financial markets.

Here’s a chart of quarter-by-quarter returns for stocks and bonds in 2022: