US Market Rally Faces Early Summer Heat

August 5, 2024 – After a promising week following disappointing economic data, US equities hit a wall as major indices and cryptocurrencies reversed their recent gains.

Momentum Shifts

In a sharp reversal from Friday’s recovery narrative, stocks opened sharply lower on Monday morning. The S&P 500 was trading down 0.5% while the Nasdaq Composite tumbled 0.6%. Cryptocurrency markets mirrored the slide, with Bitcoin falling 2% over the previous 24 hours.

Pessimistic Outlook from Wall Street

Wall Street strategists expressed concerns about further downside. Morgan Stanley strategist Mike Wilson, in Monday’s research note, forecast potential S&P 500 decline approaching 10%. Even more bearish, Evercore’s senior managing director estimated losses of up to 15% for the benchmark index.

Three Key Factors

Rally Exhaustion

The summer rally, while broadening beyond just Big Tech, is reaching its natural conclusion according to contributing analysts. This rally was fueled by positive inflation readings, hopes for reduced reciprocal tariffs, and surging demand from megacap technology stocks (namesake: Nvidia, Microsoft, Amazon, Broadcom). By late June, about 80% of S&P 500 companies were trading above their 50-day moving average, indicating strong bullish sentiment comparable to previous years.

Weakening Underlying Data

Contrary to summer optimism, recent economic indicators suggest softening momentum. Inflation pressures have persisted, while job growth and consumer spending are showing signs of deceleration. Cracks have also appeared in the tariff conflict resolution process.

The reciprocal tariff deadline, originally August 1st, was extended to August 7th. Import tariffs from Mexico remain pending final negotiation outcomes, while China faces a separate August 12th deadline. This policy uncertainty, the third significant factor contributing to current volatility, continues despite ongoing summer economic data that had previously reassured investors.

Seasonal Factors

Adding historical context, August is traditionally a challenging month for US equities. Analysis covering the past 35 years indicates an average S&P 500 return of -0.6% in the month of August. August also precedes September, often historically viewed as a weaker month.

Contributing analysts acknowledge the possibility of a perfect storm of factors impacting August performance, emphasizing that market fluctuations carry inherent uncertainty.