August lives up to its reputation as a tough month for stocks — but it could also prepare investors for the next opportunity.
It was a week’s worth of yawning—as long as you didn’t look at it
Nasdaq Composite.
The
S&P 500 index
fell 0.3% during the
Dow Jones Industrial Average
were up 0.6% but masking the underlying volatility evident in the tech-heavy Nasdaq, which fell 1.9%. In August, it is now down almost 4.9%.
There was much to worry about, including Moody’s bank credit rating downgrade and the likely trajectory of Federal Reserve interest rate hikes given consumer and producer inflation numbers, which clearly show that the easy part of fighting inflation is over. Also, a bull market previously led by just seven stocks, including Apple (ticker: AAPL), Microsoft (MSFT) and Nvidia (NVDA), cannot go on forever.
“[It’s an] “It’s a reasonable market pause,” David Donabedian, chief investment officer at CIBC Private Wealth US, told Barron’s, differing from the rally led by a handful of tech companies earlier in the year. “We now see a healthy market.”
If a choppy. The past week has been filled with false breakouts and aborted breakdowns that ultimately made a lot of noise without providing much information, especially given August’s low trading volume. But it was necessary for the stock market to continue to rise. “Many people wait and see,” says CappThesis founder and market technician Frank Cappelleri. “This was necessary for more constructive bullish patterns to form.”
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It might take a while to get to that point, and investors should use this holdup as an opportunity to trim some stocks that have rallied while adding to sectors that have been less popular. Healthcare and utilities come to mind. While
Technology Selection Sector SPDR
The Exchange Traded Fund (XLK) is up 34% this year
Healthcare Selected Sector SPDR
ETF (XLV) is about flat and that
Select Utilities Sector SPDR
The ETF (XLU) is down 8.4%.
And these sectors could come in handy when the unexpected happens. While many on Wall Street dismiss the likelihood of a recession, it’s still time to exercise caution. After all, the Fed has raised interest rates by 5.5 percentage points since March 2022, and the effects of these hikes will only be felt in the market after some time. The yield curve, a reliable predictor of recessions, remains heavily inverted. While the “R” word is scary, it also offers opportunities. “Recession is a threatening term, but it usually sets the stage for a sustained, multi-year bull market,” Donabedian says.
If we’re not already in one.
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write to Carleton English at [email protected]
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