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A Straw Man Argument

It appears that the month of August will once again live up to its dismal reputation.  The S&P 500 is down more than 3% this month, on pace to snap a five-month winning streak.  The Nasdaq Composite is down just over 5% for the month.  These pullbacks are in contrast to the market rally seen earlier this year.  The Nasdaq Composite had its best first-half performance in over 40 years.  There are several things pressuring the markets now, ranging from seasonal factors to concerns about the global economy.  Let’s look at the breakdown.

August is historically a tough month.  Over the past ten years, the S&P 500 has averaged a gain of just 0.1% in August – making it the third worst month for the index.  Go back twenty years and the performance gets worse: The S&P 500 has averaged a monthly 0.1% loss in that time.  Many attribute this lackluster performance in August to lower trading volumes.  Less volume can lead to more volatile swings in prices.  But also, due in part to investors booking profits before September, which is historically the worst month for the markets.

Economic data out of China has been lackluster, to say the least.  The world’s second-largest economy earlier this month reported much weaker-than-expected retail sales growth for July, while industrial production also rose less than expected.  A slowdown in China’s economy could spell troubles for markets around the world.  Reference my globalization comment from a few weeks back.  Additionally, concerns over another real estate crisis in China are developing.  Evergrande, a Chinese real estate giant, filed for bankruptcy protection in the U.S. last week.  All this led the Chinese central bank to cut interest rates this month.

And lastly, another source of market pressure has been concern the Fed will keep interest rates higher for longer than anticipated.  Earlier this week, that drove the 10-year Treasury note yield to its highest level since 2007.  In notes from its July meeting, the Fed noted it sees upside risks to inflation which could lead to further rate hikes.  While uncertainty surely plays a role in this month’s market move, it is not out of the ordinary for these summer months to retreat as we’ve experienced.  Once we get past September, investors will gain a small sense of confidence, and if the pattern holds true, we may see a rally develop toward the end of the year.

In company news, we learned that Subway is being acquired by Roark Capital.  While Subway has had an illustrious and marked past, it appears to have floundered in more recent times.  Roark Capital Group owns Dunkin Donuts, Arby’s, Jimmy John’s, and Buffalo Wild Wings.  Let’s hope it can turn the Subway brand around.  Speaking of turning things around, it may be too late for Rite Aid which is preparing for bankruptcy.  Apparently, it is going this route to address lawsuits the company is facing over its alleged role in the sale of opioids.  The Chapter 11 filing would cover Rite Aid’s more than $3.3 billion debt load and pending legal allegations.  And finally, NVIDIA hit a new 52-week high after reporting blockbuster earnings this week.  The stock shot up another 15% before profit-taking took about half of the week’s gains back.

In closing, I turn to the environment, specifically paper straws.  We all like to do our part to reduce waste and lower our impact on the environment.  However, it may come as a surprise to learn that paper straws may not be the panacea we were sold.  A new study reveals that paper straws are more toxic and potentially worse for the environment than their much-vilified plastic counterpart.  It seems “forever chemicals” otherwise known as PFAS are found in paper straws to a higher degree than the alternatives.  Researchers at the University of Antwerp tested 39 brands of drinking straws, which were comprised of five different materials: paper, bamboo, glass, stainless steel, and plastic.  They found that paper straws were the most PFA-filled with a whopping 90% of paper straws containing the chemicals.  Meanwhile, bamboo straws clocked in second with 80%, followed by 75% of plastic straws, 40% of glass straws, and none in steel straws.  The authors believe that the presence of these chemicals in every brand suggests they were added on purpose as a liquid repellant.  Now you know. 

Bruce J. Mason, MBA