Month in Review: August

When the stock market closed for trading on August 31, 2022, the S&P 500 finished down 3.97% for the month and 17.02% year-to-date. August probably felt like a slap in the face after getting some reprieve with July’s rally during a horrible year to anyone invested in this market.

Last month, we suggested that July’s rally might not be just another Bull Market rally, and the jury is still out as the market began to recover quite strongly last week from the August lows. This week will provide more data on how strong inflation continues to be – or not to be; that is the question.

While the destination for where the Federal Reserve will stop raising rates isn’t likely to change, either way, the Consumer Price Index report due to be released today will offer direction to the Federal Reserve and its approach to raising rates. The thinking is the Fed will raise rates by 50bps or 75bps during their next FOMC meeting on September 20. The prevailing view is that if the number comes in softer than expected, this may provide cover for the Fed to pursue 50bps and likely goose the market higher.

Nonfarm payrolls rose by 315,000 jobs in August, just below the Dow Jones estimate of 318,000. The unemployment rate climbed to 3.7%, two-tenths of a percentage point higher than expectations. Wages also rose, with average hourly earnings up 5.2% from a year ago, slightly lower than the estimate. While the combined picture paints an economy weaker than expected, many suggest that the weaker numbers are better for the market as it also might point the Fed toward tightening less quickly.

Inflation Update

Oil prices have continued their decline and remain lower by more than 20% than the highs reached this summer. Oil is now back to the prices we saw in late January. Meanwhile, wheat prices rose by 1% in August but remain 36% lower than their May 2022 high. Natural gas proves to be the problem child regarding inflation relief, with prices climbing almost 11%, just 5.71% off its high set earlier in August.

The prices of these three commodities are the main drivers of where inflation goes from here. And the reality is natural gas will likely stay elevated as Russia weaponizes its Nord Stream gas pipeline to Europe unless Mother Nature offers some relief this winter. Europe’s solution to this seemingly inevitable problem will also color the market’s response.

The State of the Market

As volatile as the second half of August was, on a technical level, the broad US market needs to rally just another 3.60% to be above the 200-day moving average, which is roughly the same as it was when we began the month of August. Viewed from a shorter vantage point, most of the market is now above its 50-day moving average, which we’ve not seen since July. Furthermore, on a positive note, the S&P main