Will stock markets take a break in August?

August is holiday month, but the world doesn’t stop turning until everyone’s back at their desks. We take a look at what moved stock prices in July and what might happen to them in the next few weeks.

Little did we know it then, but 16 June marked the bottom of the sell-off in US stocks, at least for now. Stocks remain volatile, yes, but the trend has been higher for the past six weeks and the Nasdaq tech index sits near a three-month high.

I said last month that “all eyes will be on the Federal Reserve on 27 July to see whether it repeats June’s trick and adds another 0.75% to rates in an effort to curb inflation.” Well, it did. But it was comments from Fed chair Jerome Powell that breathed new life into an already recovering Wall Street.

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Powell admitted that policymakers were aware of the negative impact rate hikes could have on the economy, and that this could influence future rate decisions. Traders took this as a sign that the worst of the monetary tightening may soon be over, which is especially good news for growth stocks.

The Nasdaq 100 was July’s best-performing global index, up 12.6%, led by big gains for stocks like Tesla Inc (NASDAQ:TSLA), Netflix Inc (NASDAQ:NFLX) and Amazon.com Inc (NASDAQ:AMZN). The S&P 500 generated its best monthly return since November 2020, up 9.1% thanks in part to Etsy Inc (NASDAQ:ETSY), Ford Motor Co (NYSE:F) and HCA Healthcare Inc (NYSE:HCA), while the French Cac 40 added almost 9% and the German Dax 5.5%.

UK stocks are unique

UK markets have followed a very different path to their American cousins. Full of steady, income generating companies like banks, insurers, tobacco and housebuilders, the FTSE 100 has outperformed every other major global stock market in 2022 so far and is the only index to show a profit – up 1%.

As I said a month ago, “the FTSE All-Share index has risen in nine of the past 13 years, and three of the four monthly losses were by fine margins.” Well, the broad index had another great July, adding 4.2% for the month. Positive returns from MITIE Group (LSE:MTO), Trainline (LSE:TRN) and Frasers Group (LSE:FRAS)helped make it 10 positive performances in 14 years. It also narrows the FTSE All-Share’s deficit in 2022 to a modest 2% and puts it fourth place in the global market performance table.

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Our more domestically focused FTSE 250 index climbed 8% last month, and the biggest 100 shares on the growth focused AIM market rose 7.5%, although the AIM 100 is still down 26.2% so far this year.

What will happen in August?

August is holiday month, not just in the UK, but on Wall Street, in Frankfurt, Paris and most other western stock exchanges. It typically means the big decision makers are out of town, with stand-ins instructed to keep the ship on course until they get back.  

This can mean markets don’t move much, especially if there are few if any geo-political events of a scale to tip markets too far one way or the other. Alternatively, if liquidity becomes an issue - not enough buyers or sellers to absorb any shift in sentiment one way or the other – markets can become volatile, with exaggerated movements in either direction.

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Studying behaviour of the FTSE All-Share index since 2000 demonstrates this quite neatly.

Over the past 22 years, the index has risen 12 times in August but normally by modest amounts – nine of the 12 increases were by less than 2%. It’s a similar story with the four small declines. However, when the market does move, it tends to move a lot. On six occasions, the All-Share index moved up or down by more than 4% in August.

According to data from the UK Stock Market Almanac, from 2000 to 2017 the average return for the month was zero, ranking August ninth of all months of the year. Since 2017, the index has fallen 3.46%, then 4.38% followed by gains of 1.84% and 1.98%.

As I said last month, “anything can happen in financial markets, and often does.” Ukraine and Russia are still at war, global energy prices show few signs of easing, and higher interest rates are likely to put further pressure on household budgets.

This story isn’t over yet.

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