Volatility returned to the markets in August, as a mid-month slump led the S&P 500 down from yet another all-time record high close on August 7th. Concerns about North Korea’s missile launch and the impact of hurricane Harvey eclipsed worries about the impending debt ceiling limit and the necessity of a new budget approval from Congress. The Dow broke above the psychological milestone of 22,000 yet failed to maintain that level.
The market closed the month of August with mixed results. The Russell 2000 was flat, the Dow squeaked out a .3% gain, the S&P 500 was less than .1% higher, and the Nasdaq added to its gains this year, up 1.3%. Both the S&P 500 and the Dow have notched five consecutive months of gains.
Only three S&P sectors gained during the month: Utilities were up 3.62%, Technology gained 1.81%, and Real Estate posted a slight rise of .37%. The other sectors all fell, led by Energy losing -5.72%, Consumer Discretionary falling -2.35%, and Materials declining -.74%. For the year, Technology still maintains the lead, with a 20.93% gain, followed by Health Care rising 15.94%, and Utilities posting a 13.16% gain. Energy remains the only sector in the red, with nearly a -17% loss year to date.
Geopolitical tensions caused a flight to safe-haven assets during the month. As a result, the yield on the 10-year Treasury fell 0.10% in August, to close at 2.12%. Gold gained about 4% for the month to finish at an 11-month high. And the price of bitcoin continued it’s meteoric climb, rising above $4700.
Oil prices declined over 6% during the month, to $47.23 a barrel for West Texas Intermediate crude, but gasoline rose to its highest level in more than 2 years. Production disruptions from hurricane Harvey caused concerns that refiners will remain closed and demand less oil, which may lead to higher stockpiles of oil but less supply of gasoline. The US Energy Department released a million barrels of oil to help boost gasoline supplies, but the impact will be minimal.
Once again, economic indicators showed positive monthly results. The Chicago PMI held steady at 58.9 in August, after having pulled back from a 3-year high in June. However, any reading above 50 indicates improving conditions. Consumer spending rose 0.3% last month, helped by higher incomes and low inflation. Initial jobless claims were still close to a post-recession low, suggesting the labor market remains strong. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1% in July on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 1.7 percent. This low inflation environment diminishes the likelihood of further interest rate hikes this year.
September has historically been the worst month for the stock market, and potentially disruptive fiscal events, including a possible government shutdown later this month, may be a catalyst for a market pullback. So far, this year there have been only seven days when the market has moved by more than 1%, compared to an average of 73 days per year over the past 20 years. With this lack of volatility, market declines may cause an emotional response from investors. However, with positive GDP growth, rising corporate earnings, and a favorable interest rate environment, any sell-off could provide a buying opportunity for stocks that may be currently overvalued.