The summer months typically bring more volatility due to lighter trade volume as many on Wall Street swap tracking stocks for travel during the dog days. The equity markets have had a robust first half of the year, due to strong earnings, lower inflation data and the hopeful thinking that the Federal Reserve will pivot and lower rates. August has started off turbulent and most likely will continue through the month of September. This seasonality ‘rough water’ is not a guarantee, but history paints a picture that these next handful of weeks will offer a downside trajectory. With July in the rearview, stock market seasonality tends to cool off in August. Since 1950, the S&P 500 has generally traded flat during the month and only finished higher 54% of the time, marking the second lowest positivity rate across the calendar (September is the lowest at 43%).
A weaker than anticipated jobs and manufacturing report is exacerbating worry that the economy may be slowing, adding even more pressure on the Fed to take action in September. The Federal Reserve wrapped up their meeting and, as expected, held the current federal funds rate at 5.25%-5.50%. That remains the highest level since 2000. The keep rates ‘higher for longer’ approach has helped bring inflation down from over 9% to the latest reading of 3%. It’s been sticky at that level, as 2% is the target to begin easing rates. There are two mandates for the Fed to consider though, inflation and employment. The balancing act begins now that the recent jobless claim was higher than anticipated.
As we hit the midway mark for earnings season, the expectation is that a company needs to land a perfect 10 in reporting revenue/earnings and guidance. If not, there have been swift corrections of 10% or more in some of Wall Street favorites. This period also tends to be a buying opportunity as the late fall and early winter months are often some of the strongest performers. With a contentious election ahead, staying a bit more neutral during the short-term uncertainty could lighten our appetite to add more risk assets to portfolios immediately. If the downward pressure accelerates, there could an attractive entry point to add more equity exposure to portfolio allocations. There also has been a rotation away from tech and growth stocks toward dividend-based options. We welcome that change but certainly still like technology for the long run.
In summary, the market seasonal sensitivity is nothing new and could be a reset for the next longer push upward.
Our entire team at Katahdin wishes you and your family a fantastic finish to summer. Please never hesitate to reach out for anything we can assist with.
Cheers!
Jay
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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Investing involves risk including loss of principal. No strategy assures success or protects against loss.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.