Probabilities suggest August tends to be tough = be wary. But we expect drawdowns to be shallow. Array ( [cookie] => 2a9f8c-4e1fce-fbcc45-6efd85-cbde9f [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

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Today’s note will include a short video update. We discuss: Why August probabilities suggest investors be somewhat wary.  There are some key economic data in the next two weeks, and the USD and oil need watching.  But the key is how one is positioned for a drawdown. (Duration: 5:37).

Anecdotally speaking, it seems clients refer to August as a “month to lose money.” Last year, the S&P 500 fell 4.2% (but August 2022 took place when stocks were caught in a death vortex from January to September).

• August is a month when many Europe and US-based investors take holiday, so there is a tendency for market depth to weaken. And if there is idiosyncratic news, the impact could be amplified.
• As for “bad” Augusts, history bears this out, since 1950:
  – August avg returns +0.01% (one of worst months)
  – win-ratio is only 55%
  – avg drawdown is -3.2%, implying 150 points downside to S&P 4,430
• When S&P 500 is up >15% thru July 31:
  – August avg return -1.4%
  – win-ratio only 40%
  – avg drawdown -3.5%
• So, it seems that the stronger the year, the worse the August risk. What does this mean? It means one needs to respect the negative seasonal going into August. Moreover, as I mentioned, it does seem like many investors tend to be wary of the month.
• And keep in mind, in 2020 and 2021, August was an up month for stocks:
  – 2020 +7%
  – 2021 +3%
• Over the next two weeks, there are several key macro data points that could impact markets. And we have shown the JPMorgan Economic Calendar below. Key dates:
  – 8/1: 10am ET JOLTS June (job openings)
  – 8/1: 10am ET ISM Manufacturing July
  – 8/4: 8:30am ET Employment report July
  – 8/10: 8:30am ET CPI July <– really the biggie
• We think July CPI report will likely be a positive surprise. This is two weeks away though. In 2023, that is funnily a long ways away. We will provide more insight as we get closer to 8/10 date.
• Could something else trigger a bigger drawdown? I guess we should be watching USD and oil:
  – USD Index has rallied from 99.50 to 101.6 recently, impressive
  – but this is up against a downtrend line
  – WTI crude has surged to $81 from $67 8 weeks ago
  – but this is still lower than $85 in April
• So those are not levels that warrant a 3% drawdown. But keep an eye as those could be the surprise. Strong USD could be stemming from the Bank of Japan yield control tweaks. But Mark Newton also sees USD, for now, as a countertrend rally. And as for oil, the economy is stronger than expected. So some recovery is expected. But if oil rises too much, naturally, we worry about inflation risks.
• August is worrisome, but the media and many investors have already flagged August as a seasonal risk. The fact that so many are citing this as a risk, actually makes us think this is less likely to be the case as well.

BOTTOM LINE: August set up tough, but we see pullbacks as shallow

Ultimately, be wary to the extent that August tends to be one of the tougher months for markets. This hardly means to go to cash. But the following is worth keeping in mind:

• probability of August being up is 55% or lower, maybe closer to 40%
• S&P 500 drawdown of 100 to 150 points is possible
• July CPI is likely a positive
• so if there is a drawdown, it is either before or after CPI report on 8/10
• the drawdown is probably short-lived, because it seems consensus
• and there are too many investors under-invested
• August ultimately will be noisy
• so the easiest thing might be to take it easy
• we are still constructive for the rest of 2023

Key incoming data August

• 8/1 10am ET July ISM Manufacturing
• 8/1 10am ET JOLTS Job Openings Jun
• 8/2 8:15am ADP National Employment Report 
• 8/3 10am ET July ISM Services
• 8/4 8:30am ET July Jobs report
• 8/7 11am ET Manheim Used Vehicle Index July Final
• 8/10 8:30am ET July CPI
• 8/11 8:30am ET July PPI
• 8/11 10am ET U. Mich. July prelim 1-yr inflation
• 8/11 Atlanta Fed Wage Tracker July
• 8/15 8:30am ET Aug Empire Manufacturing Survey 
• 8/15 10am ET Aug NAHB Housing Market Index
• 8/16 8:30am ET Aug New York Fed Business Activity Survey  
• 8/16 2pm ET FOMC Minutes
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey
• 8/17 Manheim Aug Mid-Month Used Vehicle Value Index
• 8/23 9:45am ET S&P Global PMI Aug Prelim
• 8/25 10am ET Aug Final U Mich 1-yr inflation
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey
• 8/29 9am ET June S&P CoreLogic CS home price
• 8/29 10am ET Aug Conference Board Consumer Confidence
• 8/29 10 am ET Jul JOLTS
• 8/31 8:30am ET July PCE

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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