An anxious August for markets

After a stellar first seven months of the year, August is proving to be more challenging for investors.

US shares are down about four per cent this month, which puts it on track to be the weakest month since December last year.

In some ways, this isn’t unexpected.

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August is typically one of the weaker months of the year for US shares, while it can also be one of the most volatile with many investors on holiday during the summer.

Markets have also had a very good run, with the S&P 500 index surging 28.3 per cent between the October 2022 lows and the end of July.

However, seasonality is far from the only culprit.

The yield on 10-year US Treasury bonds has been climbing steadily since late July, last week hitting the highest levels since 2007.

We’ve seen similar increases in Europe and Japan.

Bond yields haven’t been going up because of inflation, with recent readings in line with expectations and longer-run inflation expectations having slipped this month.

Last month’s decision from the Bank of Japan to raise its cap on Japanese government bond yields was a likely driver, while Fitch’s downgrade of the US credit rating might’ve also contributed.

The latter isn’t really a big deal, but it came at a time of lower than usual liquidity which means it might’ve had an outsized impact.

Optimists might argue these higher bond yields are a good thing, as they suggest markets are becoming more optimistic about the economic outlook.

Either way, bond investors are left with more yield after inflation so “real” returns are up.

That’s a headwind for shares, as conservative assets look more appealing by comparison.

Then there’s China, which is adding to the nervous sentiment.

The expected rebound from the world’s second largest economy, after strict COVID-19 restrictions were relaxed at the end of 2022, has failed to materialise.

Consumer spending has been weak, the real estate sector looks increasingly fragile and China is grappling with fears of deflation (rather than inflation).

The recent market trends could continue over the near term.

Historically, next month is not only worse than August but it’s the weakest month of all for US shares.

Since 1945, September has seen an average return of -0.5 per cent, the lowest by far and well below the average monthly return of +0.7 per cent.

Source: Bloomberg, Refinitiv, Craigs Investment Partners.

It’s also the only month of the year where the US sharemarket has declined more often than it’s increased, so don’t be surprised if the volatility persists a little longer.

On a brighter note, November and December are typically the most lucrative months of the year, while October has also been solid throughout history.

If the US economy remains resilient, inflation keeps trending lower, and central banks don’t have to do any more than they’re already expected to, this seasonal pattern might hold true again.

That would mean this current period might simply be a pothole in an otherwise rewarding year for investors.

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