August once again lives up to its dismal reputation for stocks

Wall Street is really suffering through the dog days of August.

The S&P 500 is down more than 3% this month, on pace to snap a five-month winning streak. The broader market index is also on track to post its worst monthly performance since December, when it lost 5.9%.

The Nasdaq Composite is also headed for its biggest one-month loss since December, falling 5.2%. The Dow Jones Industrial Average has declined 3% in August.

These pullbacks are a contrast to the market rally seen earlier this year. The Nasdaq Composite had its best first-half performance in 40 years in 2023. The S&P 500’s gains over the first six months of the year marked the index’s best start to a year since 2021.

There are several things pressuring Wall Street now, ranging from seasonal factors to concerns about the global economy and the Federal Reserve. Here’s a breakdown.

This behavior at this time of the year isn’t out of character.

Over the past 10 years, the S&P 500 has averaged a gain of just 0.1% for August — making it the third-worst month for the index, CNBC Pro analysis of seasonal trends showed. Go back 20 years and the performance gets worse: The S&P 500 has averaged a monthly 0.1% loss in that time.

There are several reasons the market tends to see lackluster performances this month, including:

• Lower trading volumes: Trading tends to decline in August as traders and investors go on vacation before the summer ends. This can lead to more volatile swings in prices.
• Booking profits before September: While August is a tough month for Wall Street, it has nothing on September — historically the worst of all months for the market. The S&P 500 has averaged a 0.5% loss in September over the past 20 years. Over the past 10 years, the S&P 500 has fallen an average of 1% each September.

“The S&P 500 continues to track its seasonal tendency,” Oppenheimer technical strategist Ari Wald wrote earlier this month. “For S&P 500 levels, we see 4,400 as the start of support (50-day average) that extends down to 4,200 (Feb. peak).”

Economic data out of China has been lackluster, to say the least. The world’s second-largest economy earlier this month reported much weaker-than-expected retail sales growth for July, while industrial production also rose less than expected.

A slowdown in China’s economy could spell trouble for markets around the world, including the U.S., given the sheer number of major corporations that rely on the country as a strong source of revenue.

Additionally, concerns over another real estate crisis in China are developing. Heavily indebted Country Garden Holdings fell to a record low and was removed from the Hang Seng stock index in Hong Kong. Evergrande, another Chinese real estate giant, filed for bankruptcy protection in the U.S. last week. All this led the Chinese central bank to cut interest rates this month.

“The country needs a good U.S.-style restructuring of its real estate market, where apartment prices are slashed, debt is restructured, and new equity investors are brought in as grave-dancers,” Ed Yardeni of Yardeni Research said in a note earlier in August. “Until then, we’re left watching the wreckage unfold.”

Another source of market pressure this month has been concern that the Fed will keep its benchmark lending rates higher for longer than anticipated. Earlier this week, that drove the 10-year Treasury note yield to its highest level since 2007.

In a summary from its July meeting, the Fed noted that central bank officials still see “upside risks” to inflation — which could lead to more rate hikes. Specifically, the central bank said: “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

This all comes as new data appears to show inflation is moving closer to the Fed’s 2% target. The consumer price index, a widely followed inflation gauge, rose 3.2% in July on a year-over-year basis. That rate is well below last year’s pace, when CPI peaked at 9.1%, the highest in 40 years.

Investors will get more clues on the potential for future Fed tightening on Friday, when Chair Jerome Powell delivers a speech at an annual economic symposium in Jackson Hole, Wyoming.