Investors braced themselves for a rollercoaster ride in August as the stock and bond markets experienced stomach-churning volatility. The S&P 500 and Nasdaq broke their five-month winning streaks, while the Dow Jones Industrial Average suffered its worst performance since May, according to Dow Jones Market Data Group.
Market Performance in August
The Nasdaq Composite fell by 2.2% in August, yet its year-to-date (YTD) gains remained impressive at +34%. The S&P 500 wasn’t far behind, with a 1.8% decline in August but still boasting YTD gains of +17.6%. The Dow Jones Industrial Average dipped by 2.3% in August, but its YTD performance was at +5%.
Despite this temporary setback, U.S. equities have enjoyed a robust year overall, driven in large part by the stellar performances of companies like Nvidia, Apple, Amazon, and Tesla.
Cautious Optimism Amidst Caution
Wilmington Trust’s Chief Investment Officer, Tony Roth, expressed caution in a recent interview with FOX Business. He stated concerns about the potential for slow rate decreases and stretched valuations in the U.S. equities market, particularly at the index level.
“While we’re pretty optimistic about the economy,” Roth remarked, “we’re pretty cautious about the market.”
August saw U.S. employers create 187,000 jobs, causing the unemployment rate to tick up to 3.8%. While some view this report as solid, Roth is keeping an eye on the broader economic landscape.
Navigating High-Risk Waters
Roth foresees a soft landing rather than a hard one for the economy but advises exploring alternative investments in a high-risk environment. He suggests that keeping money in cash or short-term, high-quality bonds might be a wise choice given the uncertain global economic outlook.
“The signs of stagflation in Europe and China’s economic troubles suggest there may be opportunities for significant market sell-offs,” Roth cautioned.
September: A Different Story?
Traditionally, September has been the worst month for the Dow and S&P 500 since 1950, as noted in the Stock Trader’s Almanac. However, this year, investors might find themselves in more of a holding pattern.
According to New York Stock Exchange Trader Tim Anderson, “We don’t have any earnings to start for another five weeks or so. You’ll have one Fed meeting in the middle of September, but it’s pretty much baked in the cake that they’re not going to do anything. It’ll all be about their language.”
The Federal Reserve is set to convene on September 20, and the CME’s FedWatch Tool reports that over 94% of market participants expect policymakers to maintain current interest rates.
However, Federal Reserve Chairman Jerome Powell left the door open for potential policy adjustments, stating, “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” during the Federal Reserve Bank of Kansas City Jackson Hole Economic Policy Symposium last month.
Conclusion
As August turbulence subsides, investors are cautiously optimistic yet aware of the high-risk environment. The year 2023 has shown strength in U.S. equities, but challenges persist on both domestic and global fronts. With September historically posing challenges, market participants are keenly awaiting the Federal Reserve’s next move, understanding that even in calmer waters, volatility could be just around the corner.
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