August Market Update from IFA

Week 1

The stock market logged solid declines this week. There were some winning sessions in the first half of the week, but growth concerns pushed to the forefront during Thursday's session and sparked a strong sell-off. The S&P 500 and Dow Jones Industrial Average each declined 2.1%, the Nasdaq Composite settled 3.4% lower than the previous week, while the Russell 2000 reversed its recent outperformance, dropping 6.7%.

This was partly due to the market learning Wednesday that the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%, as expected. This is leading to now a 71.5% probability of a 50-basis point rate cut at the September FOMC meeting vs only 11.5% a week prior.

Then downbeat manufacturing data on Thursday kindled concerns about the strength of the U.S. economy, and Friday’s payrolls report caused them to burst into flame. The release showed that unemployment rose to 4.3% in July as the U.S. added 114,000 jobs, below the 175,000 expected. Job gains from prior months were adjusted downward, too. The Dow plunged 852 points on Friday, while the S&P fell 1.8%, and the Nasdaq dropped 2.4%, putting it in correction territory.

Week 2

Most of the major indices closed this volatile week little changed from last Friday. The S&P 500 was fractionally lower on the week, the Nasdaq Composite declined 0.2%, the Dow Jones Industrial Average settled 0.6% lower, and the Russell 2000 underperformed, dropping 1.4%.

The market was also concerned about the U.S. economy slowing more quickly than it had previously believed it would; and it is also concerned about the Fed making (or having already made) a policy mistake by keeping the target range for the fed funds rate unchanged at 5.25-5.50%.

Only four S&P 500 sectors closed with gains. The energy (+1.2%) and industrials (+1.2%) sectors logged the biggest gains followed by communication services (+0.8%) and financials (+0.6%). The materials sector was the worst performer, dropping 1.7%, followed by the consumer discretionary (-1.0%) and utilities (-0.9%) sectors. 

One relatively steadying factor for markets this week was corporate earnings, which have remained upbeat. Among the S&P 500 companies that have reported results so far, 78% have delivered better-than-expected earnings for the second quarter, roughly in line with the five-year average of 77%

Week 3

The stock market logged solid gains since last Friday. The Dow Jones Industrial Average and Russell 2000 each closed 2.9% higher, the S&P 500 jumped 3.9%, and the Nasdaq Composite climbed 5.3%. 

This week's release of economic data that had the market feeling good about the economic environment and labor market invited strong buying activity. The pleasing economic releases included the Producer Price Index for July, which showed disinflation in total and core PPI, the Consumer Price Index for July, which was in-line with expectations, the Retail Sales report for July, which was much better than expected, and the weekly jobless claim report, which reflected ongoing strength in the labor market. 

The above events could power stocks, as in 1995 when the Fed managed a soft landing when inflation was also easing. In a note this week, Wells Fargo said the S&P 500 surged more than 40% in the 18 months following Fed chair’s Alan Greenspan’s first cut in that economic cycle. 

Goldman Sachs this week urged investors to “keep the faith” the U.S. will avoid a recession, saying investors shouldn’t get too defensive — though it did recommend to “keep fading the extremes.” 

Week 4

The S&P 500 settled 1.5% higher, the Nasdaq Composite jumped 1.4%, and the Russell 2000 closed 3.6% higher than last Friday. This price action left the S&P 500 just 0.6% below its all-time high. Volume was below-average through most of the week, reflecting a lack of participation due to vacation schedules and some hesitation ahead of potentially influential events. 

This week's lineup was headlined by Fed Chair Powell's speech at the Jackson Hole Economic Symposium on Friday, which was dovish sounding and acknowledged that "the time has come for policy to adjust." Earlier in the week, the FOMC Minutes from the July 30-31 meeting were highlighted by the Fed's comments that a rate cut was "plausible" at the meeting. 

Many stocks participated in a broad advance in the equity market. The equal-weighted S&P 500 jumped 2.1% and ten of the 11 S&P 500 sectors registered gains. The lone sector to log a decline was energy (-0.5%) while the rate-sensitive real estate sector (+3.6%) registered the biggest gain.

End of Month Notables

At the end of August’s trading, the S&P 500 posted a 2.3% gain for the month, while the Dow climbed nearly 1.8%. The Nasdaq Composite clinched a 0.7% advance for the period. The S&P 500 notched its fourth straight winning month. A surge in consumer staples, real estate and health care helped lift the broad market index in August.

There’s a lot more to the stock market than tech, particularly companies that would benefit from a growing economy juiced by FOMC rate cuts. The 8/30 release of the PCE Index showed that both inflation and the economy are slowing, enough to give the Fed cover to start cutting rates next month, but not enough to worry about economic growth.

Consumers are still much less buoyant on the economy than they were before the pandemic. But a variety of factors seems to be driving an improvement in American moods, including lower gasoline prices, a decline in mortgage rates and a buoyant stock market. 

Data from the Stock Trader’s Almanac shows September has been the worst month for the S&P 500 since 1950. In that time, the broad market index has averaged a 0.7% loss every September.

Over the past 10 years, the S&P 500′s performance for the month is even worse. FactSet data shows the S&P 500 has lost 2.3% on average over the past 10 Septembers. It has also fallen for four straight years in the month. Market bulls expect there is still upside to the S&P 500 this year, so long as it can get through the next two months with the Fed meeting and the November election.

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