A strong rally for equities in the last week of trading narrowed the month's loss, but fell short of closing it.
A steady stream of news helped drain enthusiasm from the equities markets through most of August, snapping a five-month growth streak at a time of the year known for cool market performance despite the swelter of its dog days.
Among that news: A tick in the wrong direction of a key measurement ignited fears of a second wave of inflation. Oil prices rose, as did bond yields. Federal Reserve (Fed) Chairman Jerome Powell reiterated the Fed’s commitment to lowering inflation with higher interest rates. Fitch Ratings downgraded the U.S.’s sovereign credit rating one notch from AAA to AA+. And cracks in China’s economy highlighted structural challenges in the world’s second-largest economy.
“Rising bond yields contributed to the weakness in stocks this month. A surge in Treasury issuance and the market coming to grips with the Fed’s decision to keep interest rates higher for longer policy also weighed on sentiment,” said Raymond James Chief Investment Officer Larry Adam. “Historically, the S&P 500 has experienced three to four 5% pullbacks a year – and this year, we’ve only had one. We continue to believe the market is in an uptrend.”
Despite the gloom of most of the month, the last week of trading saw a strong rally for equities in the wake of positive economic and inflation data. This narrowed the month's loss but fell short of closing it.
Looking out, the arrival of a long-expected (yet delayed) recession may be further back than some analysts estimated at the start of the year. Now, the first quarter of 2024 seems a more likely landing place than the fourth quarter of 2023. Part of that reassessment is on account of the strength of the economy entering the third quarter, particularly in regard to consumer demand, investment in structures and business inventories. The long tail of COVID-era savings may also be serving as a crutch.