Back to school guide for the financial markets

August is a month when trading volumes in the stock markets tend to slow down and any related news is scarce, such as corporate earnings releases. But above all, it’s that time of the year when most people decide to go on vacation. If you took some time off last month like we did, then we've got some key tips to help you get back to work in the financial markets.

What happened in August?

The month began with uncertainty in the stock markets, as negative macroeconomic data—especially the July US jobs report—was released that stirred fears of an economic slump. These indicators, along with news of an interest rate hike in Japan, triggered widespread profit-taking in the wake of the rallies seen in major stock markets since the beginning of the year.

But after this initial slowdown, the market quickly regained strength, spurred on by much better than expected U.S. retail sales data and strong earnings from the supermarket chain Walmart. These figures “confirmed that American consumer spending is still very strong, alleviating concerns about macroeconomic deterioration and affirming expectations of a soft landing,” explains Cristina Benito, Equity Investment Manager at MAPFRE AM.

The stock markets bounced back thanks to this momentum and have already regained lost ground. In Spain, the IBEX 35 is back to annual highs.

New rates cuts are on the horizon

For the rest of the year, investors will be paying close attention to the moves of the central banks, which will be influenced in turn by the evolution of inflation.

In Europe, we learned last week that Eurozone inflation stood at 2.2% in August, down four-tenths of a percent from the previous month. This data confirms the downward trend in prices and "supports the theory that the European Central Bank will introduce a new 25 basis point cut in September," bringing the rate down to 4%, according to Cristina Benito. In July, the ECB decided to hold off on deciding its next steps until its meeting on the 12th, and this indicator could prove to be decisive.

When it comes to interest rates, the most revealing moment was the recent speech given by Federal Reserve Chairman Jerome Powell in Jackson Hole, where he asserted that “the time has come for monetary policy to readjust,” and that the timing and size of any cuts will “depend on the data.” These statements, together with the Fed’s July minutes, reinforced the view that a 25 basis point cut will be announced at the September 18 meeting, reaching a total of 100 bp by the end of the year, which is what most of the market expects, as MAPFRE AM points out.

The macroeconomy: slowdown or soft landing?

Macroeconomic performance will be another key factor in the markets, given the uncertainty about whether the major economies are headed for a recession or simply a more benign slowdown, a scenario that the data seems to back up. Now that the central banks have made it clear that their monetary policy will be data dependent, macroeconomic data will be particularly important, so indicators like GDP growth, employment, and consumer spending will need to be closely monitored.

Risk assets will continue to fluctuate in the short term based on these reports, which may cause some volatility depending on the kind of macroeconomic scenario they reinforce. If the figures are consistent with the view of a soft landing for the economy, a mild economic slowdown, controlled inflation, and central banks beginning to cut interest rates, MAPFRE AM believes that “it will be a highly positive scenario for equities and risk assets in general.” “Our medium-term outlook would be positive,” says Cristina Benito.

September, a historically negative month

If you look at the records, September is the worst month of the year. It's the only month where historical averages consistently show negative returns, with an average decline of -1.2% in the S&P 500 since 1928, for example. There are several reasons for this: it's a time for asset rotation, repositioning for the short to medium term, and increased activity, and it can potentially trigger episodes of massive selling.

Despite these precedents and potential corrections after August’s highs, the signs aren't pointing to a particularly bad September. This could mean breaking away from September’s historical trend and setting the stage for a positive year-end.

Vertigo in the tech sector

Tech companies have been one of the biggest drivers of stock markets over the past year, with broad-based gains positioning the sector as the most bullish, mirroring the trends in 2023. But after an extended period of buying, tech stocks have started to see some corrections. The most notable case is Nvidia, which fell more than 10% after releasing its earnings report last week.

Does this mean that we’re in a corrective phase? Alberto Matellán, Chief Economist at MAPFRE Inversión, believes it's more of a "cleansing" phase. He thinks that once the sector's wave of euphoria passes, some companies will see their value decline, while the better positioned ones will continue to rise, in a process similar to what tech companies experienced in the 2000s. Thus, Matellán’s recommendation is to "be cautious" with these types of assets.