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July 2023 Recap: Rally Rolls on but August pullback could be overdue

July 2023 Recap: Rally Rolls on but August pullback could be overdue

| August 30, 2023

The rally keeps rolling on! Equities ended July on a positive note, sending the S&P 500 up over 3.2% for the month and extending its year-to-date gain above 20%. Additionally, market breadth continues to expand as we saw all 11 S&P 500 sectors post positive returns last month, led by Energy, Communication Services and Financials.

This was the fifth straight monthly gain for the index, its longest sustained rally since August 2021.

The momentum in the market was supported by various optimistic themes, including continuing disinflationary trends, and increasing economic growth. July economic reports showed annualized U.S. inflation rose at its slowest pace in more than two years in June, solidifying expectations that the Federal Reserve is moving closer toward ending its interest rate hiking cycle.

Additionally, second-quarter earnings are continuing to come in better than feared. More than half of S&P 500 companies have now reported quarterly results with nearly 80% of them showing a positive Earnings Per Share surprise, topping the five-and 10-year averages.

As I wrote about last month, the markets have been so positive in 2023 that I sense a Correction incoming. July made it through unscathed, but August could be a different story. Anecdotally speaking, August seems ripe for a pullback. For instance, last year, the S&P 500 fell -4.2. Furthermore, August is a month when many Europe and US-based investors take holiday, so there is a tendency for market volume to slow & weaken. Historically speaking, since 1950, August average return is +0.01% with an average drawdown of -3.2%, making it one of the worst months in the year. Additionally, when the S&P 500 is up at least +15% through July 31st, the average return is -1.4% with an average drawdown of -3.5%.

So, it seems that the stronger the year, the worse the August risk. Just be wary to the extent that August tends to be one of the tougher months for markets, but this hardly means to go to cash. We will keep an eye on the markets and let you know if anything materially changes.

Lastly, all eyes will be on the July CPI report being released on Thursday 08/10

Have a great month!