August delivered another strong month for U.S. equities, defying the seasonal weakness that is often associated with late summer trading. The standout performer was the small-cap Russell 2000 Index, which surged more than 7% for the month, significantly outpacing its large-cap peers. Below are the August returns for the popular benchmarks that investors track (Data provided by Y-Charts & Commonwealth Financial Network):

S&P 500 Index: +1.9%
Dow Jones Industrial Average: +3.2%
Nasdaq Composite Index: +1.6%
Russell 2000 Index: +7.2%
S&P Target Risk Moderate: +1.88%

As I noted in last month’s Market Update, stocks often pause between late summer and early fall. This year, however, August withstood that seasonal trend. Aside from a few choppy sessions, markets held firm and even pushed higher. A key catalyst was Fed Chair Jerome Powell’s speech at Jackson Hole on August 22nd, where he signaled that conditions for an interest rate cut are increasingly in place.

Markets responded enthusiastically, with equities rallying sharply that day. As of September 1st, futures markets are pricing in an 89.7% chance of a rate cut at the Fed’s upcoming meeting on September 17th, according to the CME Group.

You may be thinking, “How will stocks react if the Federal Reserve cuts interest rates?”. Lower rates reduce borrowing costs for businesses and consumers. Companies may find it cheaper to finance new projects, buy back stock, or expand operations, while households may feel more comfortable spending. All of this can help boost corporate earnings and, in turn, support stock prices.

That said, it’s important to remember that the Fed usually cuts rates for a reason, often because growth is slowing or inflation is cooling. While markets may cheer the initial move, the longer-term impact depends on whether the economy can stay on a solid footing. Historically, stocks have tended to do well in the months following rate cuts, but pullbacks and volatility are part of the process, so we should expect them.

As we’ve often highlighted on the Independent Advisors podcast, history shows that a slower pace of interest rate cuts is generally more supportive for equities. The Fed’s last cut came at the end of 2024, and we’ve now gone roughly nine months without another. That stretch of stability would be considered a “slow” cutting cycle, and aligns well with the environment we had been hoping to see.

It may seem unusual for the Fed to consider cutting rates when the stock market is trading near all-time highs. But history shows there is precedent. Ryan Detrick of Carson Investment Research recently shared a chart (below) highlighting every instance since 1980 when the Fed cut rates with stocks at or near record levels. In each case, the S&P 500 was higher one year later, 100% of the time—with an average gain of 13.9%.

Historically, September has been the toughest month of the year for equities, with data going back to 1950 showing a consistent seasonal drag. More recently, the S&P 500 has declined in 7 of the past 11 Septembers, including 4 of the last 5.

While this track record isn’t encouraging, it doesn’t mean investors should expect a “blood bath.” Rather, it’s a reminder that bouts of selling and heightened volatility are typical this time of year and should be viewed as a normal part of market seasonality.

As always, don’t hesitate to contact our team with any questions.