The volatility across capital markets continues. Following a great summertime stretch, U.S. stocks have been tumbling to the downside since the start of August. As for the bond market, it was just three months ago in mid-July when the 10-Year U.S. Treasury yield rallied its way back to 3.75% before fast tracking its way up to 5.00% in the time since. While the fundamental case for why stocks and bonds may see better days ahead – strong economic growth, persistently tight labor market, declining inflation pressures, modest inflation expectations, improving corporate earnings, widening corporate profit margins, and historically attractive valuations (outside of the so called Magnificent Seven stocks) – the fact remains that capital markets remain under steady pressure during this historically challenging time of year from early August to mid-November from a seasonality perspective. As a result, it is worthwhile to take a look from a technical perspective by more closely examining the battle lines across capital markets.

Global financial markets are shrouded in uncertainty, and the risks to the downside remain pronounced. Stocks continue to waver amid a difficult stretch dating back to the end of July. And bond yields continue to spike to levels last seen nearly two decades ago. While it is reasonable that investors may wish to recoil amid the swirling geopolitical and market risks, drawing back and taking in the views across the capital market landscape provides constructive reasons to stay the course.

The world was shaken this past weekend by the sudden and unexpected outbreak of war in Israel. As we continue to watch closely as the geopolitical and humanitarian crisis unfolds, it is also understandable to wonder about the potential impact on capital markets going forward. And history provides a useful guide to our understanding of what to expect from here.

The period from mid-August to mid-November is a notorious time of year for capital markets. The pithy investment strategy “Sell in May and go away” is based on the idea of avoiding this stretch of time of year in stocks and picking back up after Halloween. And 2023 has been no exception in this regard. While U.S. stocks had a rousing summer through the end of July, the more than two months since have been particularly rough not only for stocks but even more so for bonds. How much lower should we reasonably expect stocks and bonds to go from here?

It has been an interesting and eventful year so far. Heading into 2023, it was widely expected that the U.S. was headed toward recession and that the equity markets would face continued volatility amid the uncertain economic outlook. But in the nine months since, we’ve seen a resilient U.S. economy that continues to grow at a healthy rate and a U.S. stock market that has advanced by double-digits year to date. Nonetheless, the markets are still not without meaningful risks as evidenced by stock and bond market performance over the last couple of months. As a result, it is worth exploring what we might reasonably expect from capital markets as we move through the final three months of the calendar year.