August Was the Most Volatile Month for Stocks in Years. What Does September Hold?

U.S. stocks were mixed on Friday in the final stretch of one of the most volatile stretches of trading in years.

The Dow Jones Industrial Average and S&P 500, despite giving up early gains on Friday, were both on track to finish the month up slightly. The Nasdaq Composite was poised to close little changed.

Though the values of the three indexes effectively haven’t changed in August, it was a bumpy ride to the end of the month and, under the hood, a lot has changed.

A Bumpy Month for Stocks

August got off to a shaky start, to say the least. The major indexes tumbled as soft manufacturing and jobs data raised concerns that the Federal Reserve had waited too long to start cutting rates and risked nudging the economy into recession. At the same time, a surprise rate hike from the Bank of Japan sparked the rapid unwinding of the yen carry trade, adding fuel to the U.S. equities sell-off. The Cboe Volatility Index (VIX) spiked to a 4-year high, and the S&P 500 shed more than 6% of its value, or nearly $3 trillion, in the month’s first three trading days alone.

Then, seemingly in the blink of an eye, the tide turned and stocks had their best week of the year as labor market concerns subsided and Wall Street mulled earnings reports, which showed corporate profits grew in the second quarter at their fastest rate since 2021.

But August’s rally looked very different than what came before it. The Magnificent Seven, which led the market for most of the last year and a half, have failed to fully recover from their longest slump in years. Meanwhile, Consumer Staples, Real Estate, and Healthcare were, in that order, the S&P 500’s best-performing sectors in August as investors, anticipating interest rate cuts, flocked to rate-sensitive stocks and dividend payers. 

What’s Next For Stocks in September?

September is historically a difficult month for stocks. Though past performance is no guarantee of future returns, and there are plenty of events coming up that could give stocks a boost. 

Apple (AAPL) is expected to unveil the iPhone 16, equipped with its newest operating system capable of running generative AI, on September 9. And Wall Street is nearly guaranteed to get its long-awaited interest rate cuts when the Federal Reserve concludes its next policy meeting on September 18. 

The question on everyone’s mind heading into that meeting will be how aggressively the Fed cuts interest rates. Fed funds futures trading data put the odds of a half percentage point cut at 30.5% on Friday morning, up significantly from about 13% a month ago. Though, Wall Street thinks the most likely outcome is a smaller quarter point cut.

Along the way, Wall Street will parse August inflation data, due September 11, and the August jobs report on the 6th. Both will figure into the Fed’s deliberations as it seeks to maintain progress on inflation without suffocating the labor market.