Markets have also had a very good run, with the S&P 500 index surging 28.3 per cent between the October 2022 lows and the end of July.
However, seasonality is far from the only culprit.
The yield on 10-year US Treasury bonds has been climbing steadily since late July, in recent days hitting the highest levels since 2007.
We’ve seen similar increases in Europe and Japan.
Bond yields haven’t been going up because of inflation, with recent readings in line with expectations and longer-run inflation expectations having slipped this month.
Last month’s decision from the Bank of Japan to raise its cap on Japanese government bond yields was a likely driver, while some might point to Fitch’s downgrade of the US credit rating.
The Fitch downgrade isn’t a big deal, but it did come at a time of lower-than-usual liquidity, which means it might’ve had an outsized impact.
Optimists might argue these higher bond yields are a good thing, as they suggest markets are becoming more optimistic about the economic outlook.
Either way, bond investors are left with more yield after inflation, so “real” returns are up.
That’s a headwind for shares, as conservative assets look more appealing by comparison.
Then there’s China, which is adding to the nervous market sentiment.
The expected rebound from the world’s second-largest economy, after strict Covid-19 restrictions were relaxed at the end of 2022, has failed to materialise.
Consumer spending has been weak, the real estate sector looks increasingly fragile and China is grappling with fears of deflation (rather than inflation).
Recent trends could continue over the near term.
Historically, next month is not only worse than August but it’s the weakest month of all for US shares.
Since 1945, September has seen an average return of -0.5 per cent, the lowest by far and well below the average monthly return of +0.7 per cent.
It’s also the only month of the year where the US sharemarket has declined more often than it’s increased, so don’t be surprised if the volatility persists a little longer.
On a brighter note, November and December are typically the most lucrative months of the year for US shares, while October is usually solid.
If the US economy remains resilient, inflation keeps trending lower, and central banks don’t have to do any more than they’re already expected to, this seasonal pattern might hold true again.
That would mean this current period might simply be a pothole in an otherwise-rewarding year for investors.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
