The Fed's next steps and earnings season wrap-up: What to watch in August


Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

It's been a summer of records for the S&P 500, with the benchmark for U.S. stocks setting eight all-time highs in the month of July alone.

The S&P 500 has soared about 9% since June and is up more than 20% so far this year, about double the 10% average historical annual return for this index. Helping to drive stock prices higher was expectation among traders that the Federal Reserve would lower interest rates — which it did, slightly, at its July meeting.

In the aftermath of the first rate cut since 2008, the question on Wall Street is: What's next? The Fed lowered rates amid some signs the U.S. economy is slowing, and in August traders will watch for signs of further slowing — or a pick-up in growth.

In addition to monitoring the typical monthly economic reports, pros will use the final weeks of earnings season to get a sense of how corporate America is faring.

August is typically a slow month for stock market trading, which can increase the likelihood of bumpiness because there are fewer market participants. However, the past few months have also shown why it's important to keep your focus and stay the course when investing for the long haul.

Here's what to watch in August:

The Fed's next steps

What's happening: The Federal Reserve cut interest rates to a range of 2%-2.25% (from 2.25%-2.5%) when policymakers convened in late July. That marked their first rate cut since 2008, in the midst of the Great Recession. Lower interest rates can help stimulate economic growth by making it cheaper for consumers and businesses to borrow money.

Why it matters: Wall Street is betting on two more rate cuts by year's end. While the Fed left the door open for future rate cuts, saying it will "act as appropriate to sustain the expansion," Chair Jerome Powell hinted that further cuts aren't a guarantee. Even so, Wall Street will continue to speculate about the Fed's next steps, which could cause market choppiness, says Kate Warne, investment strategist at Edward Jones.

"The market's focus will shift to: Is it one and done, or are there more rate cuts ahead?" Warne says, adding that she expects attention on the Fed to remain "intense" in August.

What it means for you: By lowering interest rates, the Fed hopes to extend the current economic expansion, which, though the longest-running in U.S. history, has been "incredibly slow and sluggish" in terms of growth, Warne says. All the same, she says she doesn't "see anything suggesting the economy is headed for a recession."

And any market declines triggered by speculation about the Fed's next steps could be a good opportunity to buy stocks at lower prices again, Warne says.

Policymakers and professional investors will monitor economic reports due this month — including the closely watched jobs report scheduled for release on August 2 — for signs of a further slowdown.

How trade talks are weighing on corporate America

What's happening: The multiweek period known as earnings season — when publicly traded companies disclose results for the most-recent quarter — will wrap up in early August. With the season about halfway done, one trend that's emerged is that uncertainty related to trade spats could hamper economic growth.

Why it matters: Trade was a major issue for the market back in the spring, and now some corporate leaders are concerned about how continued uncertainty surrounding trade negotiations could affect their businesses. The next round of "high-level" trade talks between the U.S. and China isn't expected until September.

Based on the analysis of more than 850 companies during the current earnings season, though, Craig Hodges, chief investment officer of Hodges Capital Management, says things don't look so bad. "The sense we get is the economy is in good shape, but there is some skittishness because of tariffs," he says.

The sense we get is the economy is in good shape, but there is some skittishness because of tariffs.
Craig Hodges
chief investment officer, Hodges Capital Management

What it means for you: Corporate leaders are taking a more conservative approach in terms of forecasting for the quarters ahead, and that can cause their stocks to drop in the short term. During earnings season, there can also be some wild swings in prices of individual stocks, which in turn can affect the broader market.

But such declines can create opportunities for long-term investors looking to add stocks that have been "left for dead" to their portfolios, Hodges says.

The bottom line

August historically has been a middle-of-the-road month for the stock market, with average monthly gains of just 0.6% since 1928, according to Yardeni Research. But the market can break from historical patterns in any given month — and that's why experts recommend keeping a long-term focus.

Use the news from the month ahead to better understand what causes traders to push stock prices higher or lower. Keep perspective amid any short-term bumpiness and continue adding money to the market to take advantage of fluctuating stock prices.

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