Despite a Brutal Start to August, the Bull Market in Stocks Can Continue

August's rocky start for the stock market doesn't necessarily indicate a prolonged downturn, according to Angelo Kourkafas, a senior investment strategist at Edward Jones. He emphasizes that while the early August performance has been challenging, it doesn’t mean that the bull market is in jeopardy.

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Recent inflation data, such as the producer-price index released on Tuesday, showed that wholesale prices increased by 2.2% in July compared to the previous year. This is a slight decrease from June's 2.7% increase, offering some relief to investors concerned about rising costs. Kourkafas pointed out that the markets reacted positively to this news, with yields decreasing and stocks rising, fueled by expectations that the Federal Reserve might cut interest rates as early as next month.

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On Tuesday, the Dow Jones Industrial Average, although not reaching its session highs, was still poised for a 0.4% increase. Meanwhile, the S&P 500 saw a 1% rise, and the Nasdaq Composite was up by 1.6%, as per FactSet data.

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The uncertainty surrounding the strength of the U.S. economy grew after a disappointing jobs report for July. This has led to a debate over whether the Federal Reserve's current interest rate levels are too high and have been maintained for too long. Despite these concerns, easing inflation has provided a counterbalance. Wall Street analysts do not expect Wednesday's consumer-price index report for July to significantly alter the prevailing outlook that the Federal Reserve will initiate a rate cut next month.

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Kourkafas mentioned that the market is already factoring in an easing cycle, with expectations that the Federal Reserve will soon begin reducing interest rates. This sentiment is echoed by the broader economy, as reflected in Home Depot Inc.'s recent earnings report. The company beat earnings expectations but issued a cautious outlook for the remainder of the year. A key point raised by Home Depot’s management was that customers are postponing major spending projects, especially those related to home improvements, as they await lower interest rates, particularly for mortgages.

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Despite these trends, consumer spending remains resilient, corporate earnings are holding steady, and the economy continues to add jobs. Kourkafas advises investors to take advantage of the current environment by locking in higher yields through bonds and considering stocks that are trading at lower valuations compared to the large-cap technology stocks that have dominated the market.

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He reassures that the recent market pullback in August doesn’t have to mark the beginning of a more severe decline. Instead, these developments suggest that the bull market has the potential to persist.

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Even though all three major stock indices have experienced sharp declines in August, they remain up for the year. The S&P 500, in particular, is on track to achieve a 13% gain in 2024, demonstrating that the overall market trend remains positive despite short-term fluctuations.

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