Estimate Time9 min

Choppy markets ahead

Key takeaways

  • Markets: Stalling disinflation, rising bond yields, and an uncertain global economic outlook set the stage for a choppy market during the third quarter, despite solid economic and corporate activity.
  • Economy: As major global economies remained in late-cycle expansion, central banks shrank their balance sheets to combat inflation. With more challenged liquidity, market volatility could increase.
  • Investments: Most major US and non-US stock and bond categories declined in Q3, though rising oil prices pushed commodities and energy stocks higher.
  • Valuations: After years of very low bond yields and tight credit spreads, fixed income assets may offer relatively better income opportunities with more attractive valuations.

Stalling disinflation, rising bond yields, and an uncertain global economic outlook set the stage for a choppy market during the third quarter, despite solid economic and corporate activity.

Most stock and bond categories declined, with rising oil prices pushing commodities and energy stocks higher. Bond yields rose above their long-term historical averages causing interest-rate sensitive assets to decline the most. Increased uncertainty about inflation raised the odds of higher market volatility, amid global monetary tightening and dampened market liquidity.

At the end of Q3, many investors expected that global policy rates had reached their peaks and could ease in the coming quarters. That said, the impact of the abrupt departure from the ultralow rates era could still weigh on financial conditions in the quarters to come.

The resilient US late-cycle expansion coincided with a stalling pattern in disinflationary trends, another Fed rate hike, and rising long-term Treasury-bond yields. The late-cycle phase of the business cycle warrants smaller cyclical tilts, long-term portfolio diversification, and a readiness for opportunities.

Economy/macro backdrop: An asynchronous late-cycle expansion

Many major economies, including the US, remained in late-cycle expansion. Global crosswinds included evidence of solid service activity in many developed economies. China’s economy appeared to stabilize amid a pick-up in policy easing. Europe lost momentum amid a manufacturing downturn and a rise in oil prices.

Central banks continued to remove accommodation by shrinking their balance sheets during Q3. A more challenged liquidity backdrop may contribute to rising market volatility.

See our interactive chart presentation for an in-depth analysis.

Goodbye to easy disinflation: The easy US disinflation appears to be over. Inflation pressures that tend to be more transitory, such as supply-chain disruptions, continued to fade during the quarter. However, categories where price increases have tended to be more persistent accounted for the bulk of the third-quarter inflation drivers.

Lending standards continued to tighten: The US Treasury yield curve remained inverted and credit standards have tightened. This inverted curve, in conjunction with tight monetary policy, caused banks to tighten lending standards across multiple loan categories for the fifth consecutive quarter.

The impact of a rising cost of capital: So far, the US economy has proven to be less rate sensitive and has been able to weather this cycle’s rate hikes. Many consumers are locked into long-term fixed-rate mortgages at super low rates and large companies have issued low-rate long maturity bonds. Smaller businesses, which tend to have variable-rate, shorter-maturity debt, may be particularly exposed to this threat.

Sign up for Fidelity Viewpoints weekly email for our latest insights.

Asset markets: A risk rally interrupted

Most major US and non-US equity categories had negative returns in Q3. Most fixed income sectors drifted lower as well. Stocks and bonds were positively correlated, challenging portfolio diversification.

For the full year, US stocks remained on top with solid gains, while high-quality bonds dipped into negative territory.

Stock prices: The 2023 market rebound remained narrow. The 10 largest stocks in the S&P 500 index, concentrated in the technology and communications sectors, have accounted for the bulk of the market’s gain so far in 2023. The appreciation in valuation multiples year to date has propelled the market’s rally, even as earnings growth has declined.

Fixed income: After many years of very low bond yields and tight credit spreads, fixed income assets offer relatively better income opportunities with more attractive valuations. US Treasury yields reached their highest levels since 2007, supported by the Fed’s monetary tightening, persistent inflation, and increased market expectations for a soft economic landing.

Earnings: Global earnings growth, which has been decelerating since 2021, showed some signs of stabilizing in the third quarter. Earnings growth expectations for the next 12 months remain positive across the world.

Currencies: Stronger US cyclical growth trends relative to the rest of world imply a more favorable medium-term outlook for the dollar and could explain some of its recent outperformance. At the end of Q3, non-US currencies appeared undervalued relative to the dollar, suggesting that non-US currencies may provide longer-term potential upside and portfolio diversification benefits.

Research stocks, ETFs, or mutual funds

Get our industry-leading investment analysis, and put our research to work.

More to explore

Any screenshots, charts, or company trading symbols mentioned are provided for illustrative purposes only and should not be considered an offer to sell, a solicitation of an offer to buy, or a recommendation for the security.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Investing involves risk, including risk of loss.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

Indexes are unmanaged. It is not possible to invest directly in an index.

The third-party trademarks and service marks appearing herein are the property of their respective owners.

​The Chartered Financial Analyst (CFA) designation is offered by the CFA Institute. To obtain the CFA charter, candidates must pass three exams demonstrating their competence, integrity, and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and security analysis, and must also have at least four years of qualifying work experience, among other requirements. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917