The seasonally weak month of August has struck again. It has been the worst month for the Dow over the last 35 years so it is only natural that it snapped our feel-good momentum. We’ve had a few bad weeks in a row now as the S&P 500 officially dropped 5% from its peak in July.
Should we be alarmed?
The data graphed below says not to panic yet.
On average, 5% drops occur over three times a year since 1950. This would be our second time so far this year. So, par for the course thus far.
If you’re wondering about steeper declines, you will see that even 10% drops happen a bit over once a year.
While it’s not breaking news that stocks are choppy, it’s helpful to see what is “normal” coming off an outlier year in 2022 and zooming out can give us even more perspective.
Perhaps the bigger news story is that bond yields have crept back to new highs after the Federal Reserve’s hawkish minutes. The market consensus is now that interest rates will stay higher for longer. Longer duration bonds get hurt the most in this scenario. Even intermediate-term bonds like the 10-year treasury have struggled to keep up.
There have never been three down years in a row but that’s on the table for 2023.
But again, that’s the 10-year treasury. We have worked to keep most of our bond models overweight with shorter-term durations, which are less sensitive to interest rate increases but still paying roughly 5% in interest.
Ultimately when bonds finally bottom out, they will be an investment darling (for retirees especially) and we will shift back to a more even-weighted duration in most models.