Historically August is the second worst month for market returns.1 So far, that reputation seems to be holding true. Fueling market declines were fresh inflation data and banking downgrades, with threats of more to come.
July Consumer Price Index (CPI) numbers came in last week. This widely used measure of inflation showed a rate of 3.2%, which was slightly below market expectations. Core inflation (which excludes the volatile sectors of food and energy) rose 0.2%. While much progress has been made in lowering inflation, rates remain above the Federal Reserve’s (the Fed) long-term goal of 2%.
Moody’s Corporation, one of the nation’s top credit rating agencies, downgraded the ratings of 10 small and midsized U.S. banks last Monday.2 They also put some larger banks on notice that their rating may be impacted. This highlights the continued challenges the banking industry faces and serves as a reminder of the bank failures we saw earlier this year.
In positive news, as the earning’s season for Quarter 2 comes to a close, profits have surprised to the upside. Consumer sectors, construction, travel and streaming/gaming have shown particular strength. The VIX Index, which measures market volatility, has remained at historically low levels, signaling that the market is becoming more confident in a “soft landing”.3
As for the Fed’s plans, their next regularly scheduled meeting is in September. Continued sticky CPI numbers may push them to maintain their policy of interest rate hikes, which would also increase the odds of a recession.4 However, patience may be in order as interest rates continue to trend downward. Undoubtedly data over the next few weeks will be closely examined.
Reviewing returns for the first half of August, the markets all posted losses. As of market close on August 15th, the Dow was down 613 points (1.72%), the S&P 500 fell 151 points (3.29%) and the NASDAQ Composite Index (NASDAQ) dropped 715 points (4.98%).
1 www.horsesmouth.com “The Best Months for Stock Market Gains” June 1, 2022
2 www.jhinvestments.com “Weekly Market Recap; Week ended August 11” August 14, 2023
3,4 www.jpmorgan.com “Weekly Market Recap; Week of August 14, 2023” August 14, 2023
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