October continued the most recent slide in stock and bond prices that started 8/1/23.
2023 started with a stock market value runup that lasted through July 31, a period during which the market received increasingly good news about moderating inflation. Since then, broad stock and bond markets have experienced negative returns in each of the last three months. Interest rates are continuing to be the primary driver of stock and bond market price levels and the hope that some forecasters held for an imminent reversal in the Fed’s 5%+ overnight interest rate target has been evaporating.
As of 10/31/23, it has been 665 days since the S&P hit its all-time end of day high of 4,796 on 1/3/22. Many stock investors have become increasingly vocal about their displeasure with the length of this drawdown, as they notice that their account balances have been lower than their 2021 year end value for almost two years. Bond investors have had it worse – the drawdown in bond prices pre-dated the start of the stock market drawdown by nearly two months!
Large growth, mid growth, and international developed country equity asset class returns are still positive for 2023, but smaller cap stocks and value stocks (areas that are more sensitive to increasing interest rates) are now in negative territory year-to-date. The yield on a 10 year treasury bond briefly touched 5% on October 19 before pulling back a bit by month end. Some quick reacting investors jumped at the chance to get intermediate bonds at 5% levels – a level we have not seen since July 2007. Increased demand for these bonds has pushed prices up and yields down a bit.
There are many reasons to worry about the economy, including
- Israel-Hamas war
- US Federal government deficits and total debt servicing cost
- Earnings for many firms are coming in lower than expected – the ability to pass on higher costs due to inflation has been easy for some corporations and very difficult for others, creating volatile results across firms and industries
- Increased costs to corporations and households as debt is rolled over at higher interest rates could put a drag on spending
On the other hand, prices for most stock sectors and bonds are lower than they were three months ago, creating a lower base for newly invested principal – typically a good place to start a new bull market. We feel that the balance of overall market concern and optimism is leaving stock prices at reasonable levels and has made longer term bond prices increasingly attractive, but not quite at the level where we want to add meaningfully to our long term bond allocations.
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