Posted by Lawrence Gillum, CFA, Chief Fixed Income Strategist
Tuesday, May 2, 2023
In this week’s Weekly Market Commentary, we noted the seasonal stock market pattern in which stocks generally produce the best returns from November through April and the worst returns from May through October (although we note this pattern hasn’t been true recently). But most investors may not be as familiar with the seasonal patterns in fixed income markets. Because of the seasonal pattern in equity markets, changing investor sentiment has translated into a strong demand tailwind for fixed income markets and the summer months have generated, on average, some of the best monthly returns of the year.
As seen in the chart below, some months appear more or less favorable for core fixed income, as measured by the Bloomberg U.S. Aggregate Bond Index, with August generally being the best performing month. However, May through August has, historically, represented the best stretch of average returns for the index over the last 20 years. Moreover, that stretch has also seen the highest median returns (averages can be misleading when you’re dealing with smaller numbers) and, except June, have seen the fewest negative monthly returns. All this suggests the preferred destination for the “sell in May” crowd may be the fixed income markets.
Now, we would certainly not advocate repositioning portfolios due to these popular patterns because, again, average returns can be misleading, especially during a year that feels anything but average. So, whether the seasonal patterns in the equity or fixed income markets persist this year or not, we think owning core bonds in a diversified portfolio makes sense. The fact that fixed income markets have performed best over the summer months, when equity market volatility has tended to increase, is no coincidence. Core bonds have historically been the best diversifier to equity market risk and despite that lack of protection last year, we think the back up in yields now allows bonds to regain that role in portfolios.
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