S&P 500 Recovers August Losses as 'Irrational Recession Fears' Subside

On Thursday, the S&P 500 marked a remarkable turnaround by erasing all of its losses from earlier in August, recovering from its worst start to a month in eight years. By the end of the trading session, the S&P 500 was up 0.4% for August, while the Nasdaq Composite was only slightly down for the month, according to FactSet data.

This significant rebound came as a result of several positive economic indicators that alleviated investor fears about a potential economic slowdown. Key data released this week demonstrated resilience in consumer spending and provided reassurances about the U.S. economy’s health. Retail sales for July showed their largest increase in a year and a half, and weekly jobless claims were lower than anticipated, signaling stability in the labor market.

The strong economic data contributed to heightened expectations for a 25-basis-point interest-rate cut by the Federal Reserve at its next meeting in September. The market’s reaction was broadly positive, leading to a surge in stock prices across various sectors. The S&P 500’s consumer-discretionary sector, in particular, had its best day of the year, reflecting strong performance among consumer-facing companies.

Wall Street experienced a “broad-based buying wave,” as described by Mike O’Rourke, chief market strategist at Jones Trading. This wave of buying was driven by easing recession fears and improved economic data, which boosted both technology stocks and more cyclically-oriented sectors. Jay Hatfield, chief executive at Infrastructure Capital Advisors, noted that the market’s swift recovery was not unexpected, attributing it to an unwinding of earlier recessionary fears that had seemed exaggerated.

August had started on a rocky note for U.S. stocks, reminiscent of July’s market rotation that saw lagging sectors benefit at the expense of others. The selloff reached its peak on August 5, when stocks experienced their worst session in two years. This was driven by concerns about a potential “growth scare” and the unwinding of the Japanese yen carry trade, which led to a spike in the Cboe Volatility Index (VIX), Wall Street’s “fear gauge.” The VIX surged to levels not seen since the start of the COVID-19 pandemic but has since fallen dramatically.

In the eight days following the VIX’s peak on August 5, it dropped more than 60% to 15.2, marking its fastest decline on record. During the same period, the S&P 500 increased by 6.6%, and the Nasdaq Composite rose by 8.6%, reflecting the strongest performance for both indexes since November 2022. The Nasdaq came close to exiting correction territory, while the S&P 500 was only a couple of percentage points away from its record high set in July.

Technology stocks have been particularly strong during this rebound. The S&P 500’s information-technology sector gained 11.5% over the past six trading days, also its best stretch since November 2022. Despite this rally, technology stocks remain below their peaks from earlier in the year.

The Dow Jones Industrial Average has lagged behind both the S&P 500 and Nasdaq in August, though it has recently shown strong performance with its best three-day winning streak since October 2022. As of Thursday’s close, the Dow was down 0.7% for August but had gained 3.1% over the past three days.

Small-cap stocks, which led the market rotation in July, have also rebounded. The Russell 2000 index rose 2.5% on Thursday, though it remains down more than 5% for August.

Overall, strong economic data have been a boon for the stock market, with positive news on the economy translating into gains for stocks. However, O’Rourke cautioned that while strong economic data are generally beneficial, there is a risk that too much good news could lead to concerns about whether additional rate cuts are necessary. The S&P 500 finished Thursday at 5,543.22, up 1.6%, while the Nasdaq Composite closed at 17,594.50, up 2.3%. The Dow Jones ended the day at 40,563.06, marking a 1.4% increase.