S&P 500 On Pace For Seventh-Straight Winning Month As August Winds Down

Barring some sort of huge selloff today, we’re on track for the seventh-straight winning month.

That would be the longest positive streak for the S&P 500 Index since 2017, but investors need to avoid becoming complacent. Markets go down as well as up, and September has a reputation for being one of the weakest months of the year. More on that below.

As we survey the landscape here on the final day of August, not much seems different than a day ago. Crude is down a bit after the hurricane left most of the Gulf rigs undamaged, volatility is up a tad, and the 10-year yield remains below 1.3%. That weaker yield appeared to nick the financial sector yesterday.

Major indices barely moved overnight. The countdown toward Friday’s jobs report is under way, which could mean light, featureless trading at times. Consensus on Wall Street is for solid jobs growth of 750,000 in August, according to research firm Briefing.com.

Another factor that might have an impact is the OPEC meeting coming up this week. The organization agreed to raise output by 400,000 barrels a day every month, but that’s not in stone. The U.S. is pushing for a bigger increase. Keep an eye on crude today as that meeting looms Wednesday.

h2 Beyond The Headlines/h2

Monday was one of those days where all the radio and local television news reports will emphasize that the Dow Jones Industrial Average fell slightly. That’s true, but the 30 stocks in the DJI aren’t necessarily the best gauge of market performance. More importantly, a pretty broad rally carried seven of the 11 S&P 500 sectors to stronger finishes, helping the S&P 500 Index and the NASDAQ Composite post record closing highs.

While there’s nothing wrong with record highs, keep in mind that the tech “mega-caps,” with their heavy weightings on the indices, probably made the day look better than it was. Only about half of the stocks on the SPX were higher Monday. When you have a couple of $2-trillion heavyweights like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) up more than 3% and more than 1%, respectively, that can throw a lot of weight around in a market cap-weighted index. Remember, those two stocks alone make up about 7% of the SPX’s value.

The DJI was a victim of a steep drop in energy and financial sector stocks, two sectors that had been doing much better lately (see more below). The energy weakness might have reflected some profit-taking in the wake of what’s now Tropical Storm Ida making landfall in Louisiana, which had spiked crude and energy sector prices late last week. The storm caused about 9% of U.S. refining capacity to be taken off line, but analysts don’t expect any kind of major market impact. Instead, the missing capacity might just cause local gas prices to rise and perhaps strengthen a floor under the crude market.

h2 Volatility Softens Following Jackson Hole/h2

Meanwhile, volatility has eased the last two days since Fed Chairman Jerome Powell’s virtual Jackson Hole symposium speech. The Cboe Volatility Index (VIX) spent Monday back below 17, an area it’s only touched a few times since COVID began, but not historically low. The average over time has been close to 20.

The Jackson Hole event now feels like it might have gotten a bit over-hyped, so to speak. The stuff Powell said wasn’t that far from his and other Fed officials’ previous speeches. The takeaway is, it might have given investors more reason to think Powell and company gave the market more room to run higher. At the same time, they didn’t exactly spook the bond market, considering the 10-year Treasury yield fell back below 1.3% early this week after flirting with 1.4% before the speech.

Some analysts now say Friday’s August jobs report could be the key metric for the Fed as it considers what to do at its September meeting. As Powell noted the other day, inflation has hit the Fed’s goals but employment hasn’t. If employment gains—now averaging above 800,000 a month since May—continue to be robust in August—perhaps that’s the sign the Fed is looking for to talk about a tapering schedule at the September meeting.

For possible clues on where stocks might go, consider watching the VIX. It’s possible it could begin creeping up as Friday’s August jobs report and the long weekend approach. If that’s the case, and especially if VIX starts to flirt with 20 again. The more VIX rises going into the report, the more people might worry about a miss from the data.

VIX is going to be tricky. You’d think it would increase going into the jobs report, but it’s also possible people don’t want to be left holding options into the long weekend.

h2 Small-Caps Lose Shine And Investors Log Out Of Zoom After Earnings/h2

Another barometer worth watching is the small-cap Russell 2000 index, which was actually lower Monday even as other indices continued to rally. It’s just one day, and that’s not a trend. But weakness in the RUT versus the broader SPX over the last few weeks has some analysts a bit nervous, because RUT typically outperforms when the economy is recovering from recession. A weak RUT, especially in this environment where a stronger dollar would often be a tailwind for smaller stocks with less exposure to foreign markets, could raise eyebrows.

Also raising some eyebrows after the close yesterday were earnings from Zoom Video (NASDAQ:ZM). Shares belly-flopped more than 10% in the pre-market hours despite the company beating analysts’ consensus expectations on both bottom- and top-lines as revenue climbed 54%.

The problem for ZM these days is how to beat very tough comparisons in coming quarters as it laps the year-ago period when so many were stuck at home. Competition has also been ramping up, and the pace of growth has slowed (something that may be why shares are getting battered today). Of course, the rising number of Delta variant cases might be a boost for shares of ZM and other companies in its industry.

Farther away, another thing to keep in mind this week is any type of new rumblings on the Afghanistan front. A couple times last week, notably after the bombing that caused so many tragic deaths—including of U.S. soldiers—we saw what appeared to be some selling in response. This is something beyond anyone’s ability to predict, but consider staying on your toes if you’re actively trading.

Home To Roost: It’s no mystery that Friday’s jobs report dominates the data picture. Before that, however, investors await another piece of possibly influential data tomorrow with the Institute for Supply Management’s (ISM) August manufacturing index. Last time out, in July, the report was like a laundry list of all the problems people and businesses are experiencing in the U.S. economy, with manufacturers saying they were constrained by record raw material lead times, material shortages, transportation difficulties, and trouble finding employees.

The July headline reading fell to 59.5, the lowest since early in the year. Looking ahead to tomorrow’s report, analysts expect more slippage, down to 58.5, according to research firm Briefing.com. Normally, that would be considered solid, because anything above 50 indicates expansion. But after rising above 64 back in March, the last few months of slowing activity might be worth keeping in mind as a possible indication of how all these supply and labor issues are burdening the manufacturing sector and perhaps slowing economic growth.

Seasonal Overhang? August is on its way out with major indices on pace for slight gains during the month, but September could be where the challenge begins, so to speak. Historically, September has been the worst month of the year for the S&P 500 Index, with the benchmark index falling an average of 0.56% since 1945, according to Sam Stovall, chief investment strategist at CFRA. The SPX has advanced only 45% of the time in September, the lowest rate of any month, CFRA’s data showed.

The special challenge this September, obviously, is the Delta variant and rising caseloads around the world. However, many analysts think as tragic as this is for the victims and their families, the economy is learning to deal with COVID after last year’s lockdowns, and that economic growth isn’t necessarily in as much trouble. Still, with worries about possible Fed tightening as its meeting approaches later in September, combined with Delta, it arguably makes sense to continue to question the rally because of seasonality.

Dancing With One That Brung You: It looks like they’ve gotten the band back together. Monday saw leadership from two very familiar faces—the “FAANGs” and the semiconductors. If you’ve been following the market for a while, you probably remember how stocks like AAPL, MSFT, and Nvidia (NASDAQ:NVDA) helped lead the market through the wilderness when COVID first sunk in its tentacles, before they retreated earlier this year and sectors like Energy and Financials took the baton. What’s interesting now vs. then is that today, big-Tech and the cyclicals (Energy, Financials, and some other sectors) are marching more in sync.

While energy’s barely up for the month, it’s had a strong late August, and financials are leading all sectors in August gains with one day left in the month. Tech hasn’t been a slacker, either, up 3.3% over the last month as AAPL and MSFT have both made new all-time highs. What’s the takeaway? It seems like many investors continue to have faith in the broader economy, but maybe are playing a bit of defense, too, by “dancing with the one that brung you,” to borrow a saying President Ronald Reagan often used. This defensive tone can also be seen, perhaps in the continued strength of fixed income despite low rates, and in the dollar index, which is down from recent highs but still in striking distance.

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Written By: TD Ameritrade