Global equity markets began August with three days of sharp declines, but major indexes recovered over the remaining weeks to finish the month modestly higher. Bonds also gained for the month as economic data and comments from Fed officials solidified expectations for the initiation of interest rate cuts in September.

Market volatility

There was no easily identifiable culprit for the initial volatility. Part of it appears to have been a “buy the rumor and sell the news” effect following the Fed’s July 31 meeting. The prevailing narrative prior to that point was a “Goldilocks” scenario of mild economic growth supporting both interest rate cuts and corporate profits. With recent signs of economic softness, however, many began to worry about a deeper slowdown. To that end, more defensive sectors like Consumer Staples and Utilities held up better as the rest of the market fell.

Spending scrutiny for AI

A second factor was mildly disappointing earnings on balance from the “Magnificent Seven” technology leaders. Expectations for these beloved stocks are very high, so any signs that profits from AI initiatives may be delayed or fail to live up to the hype seems to be having a big impact. Investors are now more deeply scrutinizing significant spending on AI development that comes without tangible revenue or earnings benefits.

Nvidia continued its roller coaster. The GPU leader finished the month up around 2% but was down as much as 15% at one point and then subsequently up as much as 11% along the way. The company released earnings late in the month, reporting strong growth which beat official estimates. Still, it wasn’t enough to satisfy investors, and the stock declined in the days to follow.

After a large gain in July, small caps trailed the broader market in August. While smaller companies are often seen as more significant beneficiaries of interest rate cuts, they are also viewed as more economically sensitive.  

In it for the long haul

When bull markets finally end, most tend to roll over and die slowly, so we would normally be more concerned about a few months of small, steady declines than a few days of big ones. There is no way to predict markets, but the recent market gyrations provide yet another data point suggesting investors are better served avoiding emotional reactions and sticking with a long-term strategy.