August Outlook: Is Long Rally Running into a Buzzsaw? New Month Might Reveal

August Outlook: Is Long Rally Running into a Buzzsaw? New Month Might Reveal

Key Takeaways

    August begins with focus likely on Congress as stimulus debated

    U.S. election expected to come more into focus as month continues

    Tech’s late-July setback contemplated as possible shift away from growth

Some say never bring up politics. Looking ahead to August on Wall Street, though, it’s hard to avoid.

Entering the month, the big question is whether Congress and the White House can get together on a new stimulus package as parts of the old one vanish. It seems likely the market would take any delays or roadblocks as negative, judging from the way stocks fell toward the end of July amid political uncertainty.

Even if the stimulus gets worked out in time to prevent too much churn, another momentous political whirlwind—the presidential election—is probably going to start making itself felt as August rolls into September. November might seem like a long way off now as we try to stay cool in these summer heat waves. By the end of August, however, voting will be just eight short weeks away.

Typically, volatility picks up when presidential elections approach, and 2016 was no exception. There’s no reason to think it will be any different this year, especially with the pandemic making things even more stressful and many Washington analysts predicting a close race for Senate control.

If presidential polls continue in August the way they’ve been for a few weeks, then investors may have to figure out whether to stay the same with their strategies or if they have to prepare for some large-scale policy changes. We’ll talk more about that in weeks and months to come.

Stimulus on or Off?

The election is far off, and the issue right in front of everyone is how Congress can keep the ball rolling on a fresh stimulus package.

The one approved earlier this year gets credit from many Wall Street analysts for easing some of the sting of this horrific economic downturn. We’re struggling through the first recession in more than a decade, and Congress has managed to blunt some of the impact with regular additional checks to unemployed people, as well as a $1,200 one-time check to everyone under certain income levels.

How the next round gets decided could have a big impact on August. Democrats presented their package back in May, and Republicans just responded with their approach. Failure to reach a compromise could really put the market on its heels, raising worries about consumer spending in the absence of more government support as unemployment remains in the double-digits.

Despite a lot of recent data and earnings news being a bit better than expected, there are signs of a few sharks circling. The recent uptick in cases and deaths around the country and in parts of Europe and Asia didn’t do much to calm investor sentiment. Neither did an eyebrow-raising rise in first-time weekly unemployment claims released in late July. The number of claims jumped about 100,000, to 1.4 million for the week ended July 18. Readings are rising for the first time since April and likely will get close scrutiny as August moves along.

While you need more than one report to signify a trend, it’s alarming to see even one week of gains when claims are already historically high. The July payrolls report, due Aug. 7, seems unlikely to show much improvement over June, considering the way new claims just keep rolling in. Any climb in the unemployment rate or slower job growth in that report could put pressure on the market. It could also put more pressure on Congress to act if it hasn’t by then.

Between the stimulus worries and mounting concern about jobs and consumer spending, it doesn’t look like a typical quiet August. Then again, what month has been typical in this crazy year?

Politics aside, there’s lots of trepidation about businesses shutting back down in some states, the mystery of this year’s back-to-school season, and parents worried about whether they can get any work done if the kids stay home.

Tech Limps into August

Another question is if the late July Tech sector hiccup is simply that, or something more treacherous. Many times over the last few years we’ve seen the Tech sector stumble for a week or more (not including the market-wide late-2018 and early-2020 meltdowns) before getting back on its feet. Does the sector have another rebound left in its high-tops?

Mark Your Calendar

Here are a few data and events to watch for in August.

Economic Events
Aug. 1 ISM Manufacturing
Aug. 7 U.S. Jobs Report
Aug. 11 Producer Price Index
Aug. 12 Consumer Price Index
Aug. 14 Retail Sales
Aug. 14 Michigan Sentiment- Prelim
Aug. 18 Housing Starts
Aug. 21 Existing Home Sales
Aug. 25 New Home Sales
Aug. 25 Consumer Confidence
Aug. 26 Durable Goods
Aug. 28 Michigan Sentiment- Final

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The Nasdaq 100 (NDX), which consists of 100 of the largest non-financial companies listed on the Nasdaq (COMP) stock market, fell two straight weeks in late July for the first time since May. The NDX includes some of the biggest Info Tech and Communication Services firms out there. We’re talking about the FAANGs, in particular, as well as semiconductor companies.

It’s very hard to count Tech out or say the long rally is over, especially when the pandemic has forced so many to stay home and take advantage of what technology offers. There’s a lot of pressure on fund managers to include mega-cap Tech shares in their collections, which tends to give these stocks support on down moves (though some managers aren’t allowed to have any one stock take up more than 5% of their portfolio). There’s also a lot of speculative interest and plenty of money still on the sidelines.

Still, signs of trouble began to emerge by late July. Intel (INTC) shares took a 16% dive on July 24 after reporting earnings, with pressure coming in part from the delay of a product. Shares of Microsoft (MSFT) and Tesla (TSLA)—not officially a Tech stock but sometimes grouped with them—both lost ground despite strong earnings. Apple (AAPL) shares gave ground after several failed attempts at $400.

It’s not hard to find analysts who’ll argue that Tech has become overvalued and suggest the “value” sectors like Financial and Energy might be due for a comeback. Or they’ll point to “cyclical” sectors like Industrials and Materials starting to do better toward the end of July.

One possible strike against “value” stocks is that Financial and Energy sectors have so many fundamental strikes against them. Financials are burdened by record-low interest rates that hurt banks’ margins (the benchmark 10-year yield fell below 0.6% by late July to near all-time lows), while crude hobbles near $40 a barrel, keeping Energy shares on defense.

Meanwhile, many investors recently flocked to gold for its perceived “safety”, and avoided the dollar amid worries about the U.S. economy. Could this mean overseas stocks start getting traction? A rally in China’s stock market gave U.S. stocks some support in mid-July. Some analysts say Europe looks underpriced. We’ll have to wait and see.

So What’s to Like?

So far, we’ve focused on a lot of gloom and doom. You may be wondering if there’s any reason at all to get excited about the new month.

Some good news came July 27 when biotech company Moderna (MRNA) started its coronavirus vaccine trial and helped give the overall market a lift. Any positive headlines on that front have shown the ability to lift stocks lately, and there’s no reason to think that changes anytime soon. However, it’s unlikely any of the major trials just getting started now would have any data to report in the first month or two. Patience is required.

Another positive is that volatility continues to ease. By late July, the Cboe Volatility Index (VIX) was back to around 25 after peaking above 80 at the height of the crisis. Typically, a lower VIX reflects investors expecting less market instability and more positive price movement in the month ahead. Still, 25 is high historically. It just feels low after what investors just experienced.

In addition, July was on pace to be the fourth straight month of gains for the overall market, even if things have slowed down a bit recently.

Also, while Q2 earnings have been bad so far by any stretch of the imagination, there’s solace in the fact that they aren’t even worse than expected.

Through July 24, 128 S&P 500 companies had reported, with 81% beating analyst expectations, according to Refinitiv. However, overall S&P 500 earnings have fallen more than 40% from the same quarter a year ago, reflecting the pandemic’s impact. The 40% decline is a bit better than around 45% predicted by many Wall Street firms going into earnings season, though there’s plenty of time left. Some analysts are starting to move their projections a bit higher.

The bulk of the season is going to be behind us as we reach August, with all the FAANGs, TSLA and MSFT already in the books by July 31. Still, that leaves investors a hefty menu of results in August, including some from influential firms in these coronavirus times like MRNA, Wynn Resorts (WYNN), Clorox (CLX), Take-Two (TTWO), Roku (ROKU), and Uber (UBER). And all those come in just the first week of the month.

Later in August we get the full brunt of retailers, including Target (TGT), Walmart (WMT), Home Depot (HD), Lowe’s (LOW), and the department stores. Those should give investors some idea how the consumer is doing, though the near future of consumer demand might be partly up to Congress. Remember, on nearly all earnings reports this quarter, the Q2 numbers aren’t likely to get as much attention as usual. Instead, guidance and executive comments could be far more influential.

Maybe most importantly, investors should consider looking for evidence of how firms plan to cut spending in these tough times. That’s what the Street seems to want to hear—how they’ll bring down costs so they’re better situated if the storm continues.

Another thing that’s always key but may be more than ever this year is future plans. If 2020 is a wash, what do the executives say about next steps? How are they going to extricate their companies from the Q2 quagmire? What exactly are they changing to make sure they’re ready for any extra hits from the pandemic?

It’s fair to say every company (and every analyst, to be fair) got upended by COVID-19. We’re getting to the point, however, where many investors won’t want to hear excuses. They’ll want action. It’s more important than ever for a CEO to have a good plan.

Good trading,

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