Fed Cuts Looming: Will August End S&P 500’s Winning Streak?
Stock Market to Deliver Another Solid Month of Returns in August?
The stock market is poised to deliver another solid month of returns following its nearly 20% drop this spring. In July, the S&P 500 has returned 3%, and the technology-heavy Nasdaq has rallied 3.6% so far, bringing the total returns for those indexes since April 9, when President Trump paused many tariffs, to 28% and 38% through July 25.
This impressive performance is particularly noteworthy, especially considering that the S&P 500’s annual return has been about 11.6% over the past 50 years. However, it remains to be seen if the S&P 500 can continue climbing in August to notch a fifth consecutive month of gains.
The current rally may be getting a bit long in the tooth, given that valuations have arguably stretched and some sentiment measures appear frothy. Long-time market analyst Jeffrey Hirsch points out that August isn’t necessarily kind to stocks. According to the Stock Trader’s Almanac, the stock market historically experiences tougher seasonal tailwinds in August.
Stock Market Seasonal Tailwinds Ease in August
The performance of the stock market is influenced by a multitude of factors, including economic changes and revenue and earnings growth prospects. However, there’s also a tendency for stocks to perform well in some months and poorly in others. The Stock Trader’s Almanac has been tracking this trend since its inception in 1967.
The almanac provides valuable insights into historical index and sector performance trends. Yale Hirsch, the founder of the stock market calendar, is credited with identifying several popular seasonal trends, including the Santa Claus Rally and the January Barometer. One of the most closely considered trends is monthly average returns.
While stocks are historically solid performers in July, the backdrop isn’t nearly as friendly in August. Historically, major market indexes have posted negative returns in August, making it one of the worst months of the year for stock market returns. Average declines in post-election year Augusts range from –0.5% to –1.5%. Each index has seen more declining post-election year Augusts than positive.
August: A Historically Weak Month for Stocks
To further illustrate this trend, we’ll examine the average returns in August for each major index since 1950:
- Dow Jones Industrial Average: Down 1.5%
- S&P 500: Down 1.2%
- Nasdaq (since 1971): Down 0.8%
- Russell 1000 (since 1979): Down 1%
- Russell 2000 (since 1979): Down 0.5%
These lackluster performances for these indexes in August rank them either 11th or 12th worst out of all the months in the year.
The Impact of Valuations, Economic Growth, and Fed Cuts on Stocks
To ensure a continued rally, we’ll need things to continue going just about perfectly. Given the S&P 500’s valuation is arguably stretched, economic growth prospects and interest rate cuts will have a significant impact on stock performance next month.
For instance, how trade deals shake out with global partners like the EU will go a long way toward determining whether the economy truly sidesteps a recession. President Trump extended his pause on many reciprocal tariffs earlier in July, but set a hard stop date of August 1 for the pause.
If trade deals fall short of expectations, rethinking how tariffs may impact inflation and the economy later this year could crimp the market rally. Similarly, most expect the Federal Reserve will cut interest rates in September. However, there’s been little economic data to suggest that’s necessary.
For example, Consumer Price Index (CPI) Inflation, while sticky, was relatively timid in June at 2.7%. That’s higher than the Fed wants, but still down from 3% in December. If unemployment picks up before September, the Fed may reduce rates by a quarter percentage point. The unemployment rate is 4.1%, which is about where it’s trended since last summer.
Investor Considerations
For most investors, month-to-month seasonality shouldn’t impact their long-term investment plans. However, investors who consider themselves active day traders or position traders may want to pocket some of their recent profits to raise a little cash in case they get better buying opportunities if stocks swoon in August.
After all, stocks rise over time but don’t do it in a straight line. There are plenty of zigs and zags along the way.
Conclusion
The stock market’s performance is heavily influenced by various factors, including economic growth prospects, interest rate cuts, and trade deal outcomes. Given the S&P 500’s valuation has arguably stretched, we’ll need things to continue going just about perfectly for a continued rally next month.
Historically, August hasn’t been kind to stocks, with major market indexes posting negative returns in August. The seasonality of stock performance should not be overlooked by investors.
