The recent pullback in the U.S. stock market during the month of August is not a surprising development, according to Tom Lee of Fundstrat. However, the 5.6% slide in the S&P 500 has been worse than usual for this time of year. Despite this, Lee believes that the pullback will likely be a temporary phenomenon. In his analysis, he explores the reasons behind the decline and offers insights into what it would take to turn it into a more significant rout.
August stock-market pullback is no surprise, but it’s worse than usual: Tom Lee
August has historically been an unpredictable month for the stock market, often characterized by increased volatility and low trading volume. It is not uncommon for the market to experience a pullback during this time, and the recent decline in the S&P 500 aligns with this trend. However, the magnitude of the slide, amounting to a 5.6% decrease over 15 trading sessions, is more severe than what is typically observed in August. Despite this, Tom Lee maintains that the retreat is likely to be a result of the seasonal conditions rather than a representation of a larger downward trend.
Reasons behind the August stock market slide, according to Tom Lee
According to Tom Lee’s analysis, there are several factors contributing to the August slide in the stock market. Firstly, the rise in the 10-year Treasury yield, which reached a 15-year high, has had a significant impact. Additionally, the strengthening U.S. dollar and an increase in the Cboe Volatility Index have further heightened market volatility. Furthermore, concerns over China’s economic data and property market have added to investor unease. These combined factors have created a bearish sentiment in the market, leading to the recent decline in stock prices.
What could turn the August slide into a serious rout, according to Tom Lee
To turn the current slide into a more serious rout, Tom Lee suggests that additional factors would need to come into play. He highlights that a further rise in yields, particularly if it threatens to “break something,” could spark a larger selloff. Additionally, if there is a significant increase in oil prices and signs of wage pressures rising, investors might question whether inflation is on a downward trajectory. These developments could potentially lead to a deeper slide in the stock market. However, Lee acknowledges that at the moment, these scenarios are speculative and do not seem to be immediate threats.
Signs of stability as the stock market reacts to rising bond yields, says Tom Lee
Although the recent surge in bond yields has weighed on stock prices, Tom Lee points out that the market is offering signs of stability. He notes that such jumps in yields often occur near the end of a selling cycle for equities. This is supported by historical data that shows stocks tend to bottom out within a few days after a significant jump in yields. Additionally, technical indicators suggest that stocks are oversold, further indicating the potential for a market rebound.
Important dates to watch for the market’s next move, according to Tom Lee
Tom Lee identifies a couple of dates that could be significant in determining the market’s next move. On August 24, chip maker Nvidia Corp. is scheduled to report its second-quarter results. Given the company’s previous positive earnings report, which sparked a surge in tech stocks, this announcement could have an impact on market sentiment. Another important date to watch is August 25, when Federal Reserve Chair Jerome Powell is set to address the Kansas City Fed’s annual symposium. Last year, Powell’s speech at this event marked the top of a market bounce, with stocks subsequently experiencing a significant decline. Investors will be closely monitoring Powell’s remarks for any indications of future monetary policy decisions.
While the August stock market pullback is worse than usual, Tom Lee believes that it is likely to be a temporary phenomenon. He attributes the decline to a combination of seasonal factors such as rising bond yields, a stronger U.S. dollar, and concerns over China’s economy. Lee suggests that for the slide to turn into a serious rout, additional factors such as a significant rise in yields or an exogenous shock would need to come into play. However, he remains optimistic that signs of stability in the market indicate a potential rebound in the near future. Investors will closely watch upcoming events such as Nvidia’s earnings report and Powell’s speech for further market cues.
Analyst comment
Neutral news: The recent pullback in the U.S. stock market during August is worse than usual, but likely to be temporary, according to analyst Tom Lee. The decline is attributed to seasonal factors, such as rising bond yields and concerns over China’s economy. To turn it into a serious rout, additional factors would need to come into play. Signs of stability and upcoming events like Nvidia’s earnings report and Powell’s speech could provide further market cues.
