A Selloff? After Head-Spinning Swings, Stocks End August Higher

In August, major U.S. stock indexes managed to close the month with gains, despite navigating through significant volatility. The market's performance was buoyed by a series of positive economic reports that helped to counterbalance concerns about the labor market’s health.

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After a turbulent month, stocks ended August not far from where they began. The S&P 500 rose by 2.3% from the end of July, bringing it close to its record high. The Dow Jones Industrial Average gained 1.8% for the month, while the Nasdaq Composite, which is heavily weighted towards technology, inched up by 0.6%.

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The month began on a shaky note, with a disappointing July jobs report triggering fears about the economy's strength. This led to a significant pullback in the stock market, particularly affecting large technology stocks, as investors unwound popular trades. However, the market quickly recovered as subsequent data reports provided a more optimistic view of the economy. Inflation showed signs of easing, retail sales saw a notable increase, and weekly unemployment claims remained stable, indicating that while the labor market might be slowing, it wasn’t leading to widespread layoffs.

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Despite these positive developments, the market remains in a precarious position. Investors and analysts are still cautious, noting that the labor market continues to be a source of concern. The upcoming August jobs report, set to be released on September 6, is expected to play a crucial role in shaping market sentiment.

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Federal Reserve Chair Jerome Powell has indicated that the central bank plans to cut interest rates at its next meeting, scheduled for September 17-18. However, there are mixed signals from other Fed officials about how aggressively rates should be cut after that point. This uncertainty adds another layer of complexity to the market’s outlook.

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Sonu Varghese, a global macro strategist at Carson Group, commented on the current state of the economy, noting that while it’s in decent shape, the trend is worrisome. "That’s why I say risks are rising," Varghese said, reflecting a growing concern among market observers.

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The stock market ended August on a strong note, with a late surge on the final day of trading. The S&P 500 climbed 1% on Friday, the Dow added 0.6% (approximately 228 points), and the Nasdaq advanced by 1.1%. For the year, the S&P 500 has gained 18%, highlighting the overall strength of the market despite the recent volatility.

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Friday’s rally was driven by the release of generally positive economic data. The Commerce Department reported that personal spending increased by 0.5% in July, up from a 0.3% rise in June. Personal income also exceeded expectations, and the Federal Reserve's preferred inflation measure remained steady at 2.5% on an annual basis. This data reassured investors about the underlying health of the economy, providing a boost to the stock market.

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Among individual stocks, Dell Technologies saw a 4.3% rise in its share price after reporting higher revenue and profit, driven by strong demand for its AI-oriented servers. On the other hand, Ulta Beauty’s shares fell by 4% after the cosmetics retailer lowered its full-year outlook, signaling potential challenges ahead.

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The bond market experienced similar choppiness throughout the month. Yields on U.S. Treasurys initially rose following the strong personal spending data but later fell back before climbing again. This movement suggests that traders are bracing for a surge in corporate bond issuance after the Labor Day holiday. By the end of the session, the yield on the 10-year U.S. Treasury note settled at 3.910%, up from 3.866% the previous day, though still below the 4.107% level at the end of July.

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Some analysts believe that the market might be better positioned to handle potentially disappointing jobs data for August than it was in early August. The timing of the upcoming Federal Reserve meeting is a key factor in this assessment. Ed Clissold, chief U.S. strategist at Ned Davis Research, noted that being closer to the Fed’s meeting could alleviate some concerns, as investors won’t have to wait as long for the central bank’s response to new economic data.

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Interest rate futures on Friday suggested that investors see a roughly 31% chance that the Fed will cut rates by a larger-than-usual half percentage point at its next meeting. This is a significant decrease from the 85% probability seen earlier in the month, but still higher than the 12% chance at the end of July.

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In summary, while August was marked by significant swings in the market, the major indexes managed to post gains by the month’s end, supported by encouraging economic data. However, the outlook remains uncertain, with upcoming labor market data and Federal Reserve decisions likely to play a critical role in determining the market’s direction in the coming weeks.

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