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October has a reputation for being a spooky month, and stocks have historically not fared well during this time. Black Tuesday in 1929, Black Monday in 1987, and the start of the 2008 financial crisis all occurred in October, as pointed out by my colleague Nicole Goodkind.
And just five days into the month, it seems like this October is shaping up to be quite chilling. Before you check your 401(k), proceed with caution. Consider yourself warned.
The good news is that Thursday was a relatively uneventful day for stocks, with the S&P 500, Dow, and Nasdaq all closing down by less than 0.2%.
However, stocks have been going through a rough patch lately. Over the past five trading days, the Dow has lost over 760 points, or 2%. These declines have pushed the index into negative territory for the year.
So, what's causing all this volatility?
Bonds have been putting a spell on stocks recently.
When government bond yields are high, stocks tend to struggle because investors can get higher returns on less risky assets. And right now, bond yields are indeed elevated.
The last time yields on 10-year US Treasury notes were this high was just before the Great Recession. Spooky, right?
Now, let's take a quick break to explain what yield means.
Treasury notes are essentially loans to the government. When you lend money to the government, you earn interest, which is known as the yield.
Here's the catch: When lots of people buy bonds, the price goes up, and yields go down. Conversely, when lots of people sell bonds, the price goes down, and yields go up.
When official interest rates rise, investors expect higher returns on bonds, leading to increased yields. This creates an incentive for investors to sell their current bonds and buy newly issued ones with higher interest payments.
Now, back to the main story.
Investors now believe that the Federal Reserve will keep interest rates higher for a longer period than initially anticipated when the central bank began its actions in March. Additionally, the government needs more money to finance its spending, leading to increased bond issuance and lower prices.
So, as we navigate through this spooky October, keep an eye on your investments and brace yourself for potential market volatility.