The third quarter began with a continuation of the strong 2nd quarter rally but ended weak following continued inflation and interest rate hike concerns coupled with union strikes and another looming government shutdown. The negatives outweighed the positives this past quarter and all major stock indexes were down. However, year to date returns are still up, the world stock market is up 9.65% and the S&P 500 is up 13.1%. If they remained at these levels till the end of the year it would be viewed as an average return year.
Quarterly Market Index Returns and Year to Date as of October 1st, 2023
Quickly rising bond yields were a major contributor to the downturn last quarter and led to bond investments also yielding negative returns. August and September felt like a repeat of the problems investors and the economy faced in 2022, albeit in a more muted manner. In September the federal reserve forecasted another rate hike for 2023 and fewer rate cuts in the second half of 2024. Investors were dismayed to hear this forecast as they were hoping for an end to the monetary tightening cycle and an early start to the easing cycle (rate cuts). Investors quickly reacted to this information and pushed the stock market to new lows for the current market pullback which began on July 27th.
The current pullback (a 5-10% market drop) is the 4th in the past 12 months and is of a long time duration at 45 trading days (every day the stock market is open). Researching back to 1942 we can calculate that 87% of pullbacks last less than 50 days and 93% last less than 70 days. Based on those probabilities it’s highly likely that this pullback will find a low by the end of October. The current low is 8% below the high price on July 27th and this is typical of a moderate pullback.
I believe this year should be above average considering 2022 was a negative year and a bear market, it is the third year of a president’s term, and we saw high inflation. First, the stock market often performs well following a negative year as the new bull market heats up. Also, as previously discussed, the third year of a president’s term has historically been a year of good market returns because the president’s agenda is known and the least amount of legislation is passed (less uncertainty). In addition, long term stock market returns generally keep up with inflation, although they haven’t over the last 2 years as real estate returns skyrocketed and stock returns have been negative. At some point there should be a revision to the mean as stock returns make up for lost ground. For these reasons, and more, I believe there is a good probability that the 4th quarter will be a positive one and we will finish out 2023 with above average yearly returns.
Photograph by: Mediamodifier on Unsplash