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Following a punishing first nine months of 2022, stocks had been on a roll, with prices rising for three quarters in a row: Q4-2022, Q1-2023, and Q2-2023. But a swoon in August and September ended the streak.

The recent stock market decline ranged from 2% to 5% during the third quarter, depending on which index you choose to follow. To paraphrase Michael Lee Aday (aka Meat Loaf), three out of four ain’t bad.

Intermediate and long maturity bond yields climbed significantly during the quarter, with the 10-year Treasury yield reaching its highest level in sixteen years toward the end of September, at 4.6%. Higher yields translate to lower prices for bonds.

In fact, if interest rates continue to rise into the end of 2023, investors may witness something that hasn’t happened before: three consecutive calendar years of negative returns for US Treasury bonds.

The US dollar bucked the recent negative trend and reached new highs for 2023 in September. Compared to other major currencies, the US dollar appreciated by about 3% in the third quarter.

Dollar strength places additional pressure on foreign stocks, because for US-based investors, the total return of a foreign investments also incorporates changes in the value of US dollar. Foreign stocks declined by 4.9% during the third quarter.

Oil has also bucked the recent negative price trend affecting stocks and bonds. For more on developments in the oil market, see the next section.

Below is a summary of quarterly returns for stocks and bonds as of September 30.

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.