Market Review Q323: A Change in the Weather

The quarter started off strong enough in July but gave up ground in both August and September. The total return of the S&P 500 was down 3.27% for the quarter. Interestingly, the Vanguard balanced fund ETF, VBIAX (a good proxy for the 60/40 strategy), was down nearly the same amount, 3.24%, for the quarter. Clearly, the big increase in longer-term yields was a big factor for both.

But why did longer-term rates go up so much? Will they stay higher? How will it affect stocks and other assets? Digging into the details of what caused rates to go up provides some insights but falls short of providing the kind of understanding that can give investors direction. For that, a broader perspective is needed.

A list of explanations

A recent piece in the FT's Unhedged letter ($) did a nice job of chronicling possible explanations for higher rates. That list includes "Expected rate volatility is higher, perhaps because expected inflation volatility is higher", "Uncertainty around US solvency and/or political stability is higher", "Treasury supply has risen sharply, and will keep rising", "Foreign Treasury demand is not rising", "The marginal buyer may be growing more price-sensitive", "The balance of risks for bonds has shifted", and "The drumbeat of QT continues".

In addition, that list also "sanitizes" some of the more extreme views the commentariat has spewed out and to which investors must sort through. For example, several claims have been made that "Foreign Treasury demand is crashing". That's not true. A lot of people don't do the work. The bottom line is it is more accurate to say, "Foreign demand is not rising".