As we discussed here last week, August has been one of the worst months for stocks in recent decades. After last week’s more than 3% drop in the S&P 500 Index, seasonality could be taking hold once again in U.S. equities.
Outside of August’s track record, we’ve identified our three keys for the market this month:
1) Trade. Trade tensions will almost certainly be the biggest stock market driver in August. They certainly have been so far. U.S. and China negotiators have a meeting scheduled for September, which takes on greater importance after President Trump’s latest tariff threat last week.
“We still expect progress on trade and tariff reductions in the coming months,” noted LPL Chief Investment Strategist John Lynch. “However, we are mindful that the dispute could drag well into 2020 after this latest escalation, which may lead to more market volatility like we have experienced over the past several days.”
2) The Federal Reserve (Fed). After the expected 25 basis point (0.25%) cut July 31, bond market participants questioned whether they were being too aggressive in pricing in future cuts. We expect the Fed to cut rates at least one more time this year as trade tensions continue to simmer, which may help provide support for stocks. At the same time, bouts of volatility around shifting Fed expectations would not surprise us.
3) Earnings. Earnings season is winding down, but it could still move markets this month with 110 S&P 500 companies left to report. We expect second quarter earnings for the S&P 500 to be fractionally positive despite some sizable headwinds, including tariffs, the strong U.S. dollar, and Boeing’s sizable loss. The impact of this month’s earnings news may be drowned out by trade, but we do expect improvement later this year and into 2020 as those risks potentially abate.
Look for more of our thoughts on the month ahead in today’s Weekly Market Commentary, due out later today.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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