{"id":47938,"date":"2023-08-13T13:14:13","date_gmt":"2023-08-13T17:14:13","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/a-stumbling-stock-market-faces-a-crucial-summer-test-heres-what-will-decide-the-bulls-fate\/"},"modified":"2023-08-13T13:14:16","modified_gmt":"2023-08-13T17:14:16","slug":"a-stumbling-stock-market-faces-a-crucial-summer-test-heres-what-will-decide-the-bulls-fate","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=47938","title":{"rendered":"A stumbling stock market faces a crucial summer test. Here\u2019s what will decide the bull\u2019s fate."},"content":{"rendered":"

Call it the end-of-summer blues.<\/p>\n

History shows that things can get ugly \u2014 and volatile \u2014 for the U.S. stock market in August and September. So a rocky start to the month shouldn\u2019t be a big surprise. Indeed, even bulls might pine for some near-term consolidation after a torrid run that saw the S&P 500 index
\n SPX
\n rally nearly 20% over the first seven months of 2023. Through Friday\u2019s close, the index is still up nearly 25% from its bear-market closing low of 3,577.03 hit on Oct. 12.<\/p>\n

\n

But what would send the 2023 rally decisively off the rails? <\/p>\n

To answer that question, it helps to think about what has been driving the rally. Mark Hackett, chief of investment research at Nationwide, argues that the rally has largely been about fears that never materialized.<\/p>\n

\u201cI would say about 90% of the move that we\u2019ve seen over the last 10 months has really been a walking back from the ledge of fear,\u201d Hackett told MarketWatch, in a phone interview.<\/p>\n

The October 2022 lows came as the Federal Reserve was hiking the fed-funds rate in outsize 75 basis point increments, inflation was just coming off its June peak last year above 9% and expectations for an imminent recession, or \u201chard landing,\u201d were running hot.<\/p>\n

Tom Essaye, founder of Sevens Report Research, contends the rally has been built on three pillars: The Fed is now seen by many investors as likely finished, or nearly finished, raising interest rates; the economy appears set to possibly avert a recession altogether, and inflation has remained largely on a downward path.<\/p>\n

So trouble for the market would emerge if economic data were to falter and begin pointing to a hard landing, core inflation leveled off or bounced, or Fed Chair Jerome Powell signaled another rate hike is \u201cdefinitely coming\u201d and caused a further rise in Treasury yields.<\/p>\n

\u201cThis scenario would essentially undermine the three pillars of the rally, and as such investors should expect a substantial decline in stocks, even considering the recent pullback,\u201d Essaye said in a note last week. \u201cIn fact, a decline of much more than 10% would be likely in this scenario, as it would undermine most of the rationale for the gains in stocks since June (and perhaps all of 2023).\u201d<\/p>\n

That scenario has yet to materialize. <\/p>\n

The year-over-year rate of inflation as measured by the U.S. consumer price index rose to 3.2% in July from 3% in June, data showed last week. But the core rate, which strips out food and energy, slowed to 4.7% from 4.8%. The July producer price index, a measure of costs at the wholesale level, came in a touch stronger than expected, but didn\u2019t change investor expectations for the Federal Reserve to leave rates unchanged when policy makers next meet in September.<\/p>\n

Policy makers will see another round of jobs data, including the August employment report, and inflation figures before that meeting.<\/p>\n

Meanwhile, a jump in Treasury yields, with the rate on the 10-year note pushing back above 4.15% after hitting a 2023 high near 4.2% earlier this month, is getting much of the blame for continued softness in the stock market. Rising yields can make Treasurys look more attractive than other assets and also raise the cost of financing for companies.<\/p>\n

The S&P 500 edged down 0.3% last week, suffering its first back-to-back weekly decline since May. The large-cap benchmark is down 2.7% so far in August, trimming its year-to-date gain to 16.3%. The Dow Jones Industrial Average
\n DJIA
\n rose 0.6%, while the Nasdaq Composite
\n COMP
\n shed 1.9%.<\/p>\n

A lack of obvious near-term catalysts could set the stage for the market to further struggle. A light week lies ahead for U.S. economic data, featuring July retail sales on Monday and the release of the minutes of the Fed\u2019s July meeting on Wednesday.<\/p>\n

A slew of major retailers are set to deliver results as the second quarter earnings reporting season enters its final stretch. <\/p>\n

Nationwide\u2019s Hackett said the market setup coming into August was nearly a mirror image of October\u2019s gloomfest. Hedge funds and other large investors are no longer betting against the market, while longtime bears and pessimistic economists are throwing in the towel and issuing mea culpas.<\/p>\n

Stocks have rallied since late last year as fears priced into the market didn\u2019t materialize, but now that dynamic is gone.<\/p>\n

Related: <\/strong>S&P 500 has a new record high 2023 price target. Here\u2019s a look at Wall Street\u2019s official stock-market outlook.<\/p>\n

Just as overwhelming pessimism set the stage for the market rally, widespread optimism over a \u201cGoldilocks\u201d scenario of falling inflation, a tame Fed and solid economic growth could eventually spell trouble for the bulls, Hackett said. Expectations don\u2019t yet appear that extreme, but bear watching, he said.<\/p>\n

Meanwhile, investors also face seasonal concerns. August is historically a middling month for the S&P 500, producing an average gain of 0.67% based on data going back to 1928, according to Dow Jones Market Data. That makes August the fifth-worst performing month for the S&P 500. September is the worst performing month, producing an average downturn of 1.1%.<\/p>\n

For the Dow Jones Industrial Average, August has seen an average return of negative 0.8% since 1986, making it the worst performing month for the blue-chip gauge. In the decades before 1986, August was the blue-chip gauge\u2019s best month.<\/p>\n

Mark Hulbert:<\/strong> August used to be the best month for the stock market. Then it became the worst.<\/p>\n

And then there\u2019s volatility. <\/p>\n

Going back to 1990, the Cboe Volatility Index
\n VX00,
\n -4.91%<\/bg-quote>,<\/span>
\n known as the VIX, has seen its yearly peak most often in January (six times), followed by August and October at five times each, noted Jessica Rabe, co-founder of DataTrek Research, in a note last week. <\/p>\n

By that measure, investors are now in the middle of one of the most volatile months of the year with still another to come in October.<\/p>\n

\u201cU.S. equities tend to outperform during calmer environments, so it makes sense that they rallied in July, but are struggling so far in August,\u201d Rabe said. \u201cThe upshot: seasonal trends say U.S. equities could prove whippy through October until quieting down during the last two months of the year.\u201d<\/p>\n

Hackett doesn\u2019t expect the bull market to come off the rails, but sees scope for some near-term consolidation that will likely prove healthy over the long run.<\/p>\n

\u201cIt\u2019s something that you don\u2019t want to try to be too cute with because I don\u2019t see the market as being really susceptible to a significant period of pain. I think it\u2019s just a pretty natural, pretty healthy consolidation phase,\u201d he said. <\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Call it the end-of-summer blues. History shows that things can get ugly \u2014 and volatile \u2014 for the U.S. stock market in August and September. So a rocky start to the month shouldn\u2019t be a big surprise. Indeed, even bulls might pine for some near-term consolidation after a torrid run that saw the S&P 500 […]<\/p>\n","protected":false},"author":1,"featured_media":47939,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-47938","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nA stumbling stock market faces a crucial summer test. 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