Why the bull market in stocks can continue despite a brutal start to August

By Joy Wiltermuth

'The pullback in August doesn't need to be the start of something worse,' strategist says

A rough start for stocks in August doesn't necessarily spell the start of something worse, according to Angelo Kourkafas, a senior investment strategist at Edward Jones.

Inflation data, including Tuesday's producer-price index, showed that wholesale prices increased 2.2% in July on a year-over-year basis, down from 2.7% in the prior month.

"Markets are responding favorably to that," Kourkafas said. "Yields are down, stocks are up, based on expectations that the [Federal Reserve] will be able to cut interest rates next month."

The Dow Jones Industrial Average DJIA was off the session's highs but still on pace for a 0.4% gain on Tuesday, while the S&P 500 SPX was 1% higher and the Nasdaq Composite COMP was up 1.6%, according to FactSet.

Concerns about the resilience of the U.S. economy intensified after a weak jobs report for July, sparking debate about whether the Federal Reserve had already left rates too high for too long.

But the other side of the Fed's equation has been easing inflation. Wall Street isn't expecting Wednesday's consumer-price index for July to change the outlook for a Fed rate cut next month.

"We have seen markets already pricing in an easing cycle," Kourkafas said.

Main Street appears to be on a similar page. Kourkafas pointed to Home Depot Inc.'s (HD) earnings report on Tuesday that beat expectations but provided a downbeat full-year outlook. He focused specifically on comments from management about the store's consumers deferring spending on big projects while waiting for lower interest rates, especially on the mortgage front.

With consumers still spending overall, earnings holding up and the economy adding jobs, Kourkafas recommends that investors start locking in higher yields in bonds and penciling in stocks that trade at lower valuations than megacap stocks.

"The pullback in August doesn't need to be the start of something worse," Kourkafas said of stocks. "This all suggests the bull market can continue."

All three major stock indexes are down sharply in August but are still up for the year, with the S&P 500 on pace for a 13% gain in 2024.

-Joy Wiltermuth

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08-13-24 1059ET

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