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Stock Market Rollercoaster: Why August May Make or Break Investors’ Confidence

Summer may be heating up, but for the stock market, August and September have traditionally been cooler – and sometimes outright icy. The S&P 500’s impressive surge of nearly 20% over the first seven months of 2023 has many investors on edge. The big question now: Is the rally sustainable?

So, what could potentially douse the flames of this fiery bull run?

According to Mark Hackett, Nationwide’s chief of investment research, much of the recent momentum has stemmed from economic fears that, so far, haven’t come to fruition. Remember those dark days of October 2022? The Federal Reserve’s aggressive interest rate hikes, mounting inflation, and loud whispers of an impending recession had market pundits predicting doom. However, as these anticipated economic bogeymen failed to show up, the market rebounded.

Three pillars have been holding up this rally, according to Tom Essaye of Sevens Report Research:

  1. A belief that the Fed is nearly done with rate hikes.
  2. A hopeful dodging of the recession bullet.
  3. The downward trajectory of inflation.

If these pillars were to crumble – say, due to unexpected economic downturns, stalled inflation rates, or surprise actions from the Federal Reserve – the stock market could face a significant tumble. The recent inflation rise to 3.2% in July has already raised eyebrows, but many investors are still banking on the Fed to maintain its current stance on rates come September.

Recent fluctuations in Treasury yields, however, are already causing jitters. Higher yields can make other assets less attractive and hike up financing costs for corporations. Add in the S&P 500’s dip of 2.7% this August (though it’s still up by 16.3% this year), and you’ve got a cocktail of investor anxiety.

For now, there’s a light economic calendar ahead, punctuated by retail sales data and a look into the Fed’s July meeting minutes. Investors will also be tuning in to Q2 earnings reports from leading retailers.

Yet, even with the current upbeat mood, Hackett warns against too much optimism. Remember the market rally propelled by overwhelming pessimism? A too-rosy outlook might just set the stage for a reverse scenario. While Hackett doesn’t foresee a significant market crash, he believes a bit of consolidation could be on the horizon. And perhaps that’s what the market needs – a brief pause to breathe, recalibrate, and build strength for the next ascent.

As we wade through August and brace for September, the stock market landscape could shift dramatically. But here’s a nugget of wisdom for our entrepreneur and investor readers: It’s often in the most unpredictable market climates that the savviest find opportunities. Stay informed, stay agile, and as always, invest with a keen eye on the long game.