Why this Friday is key for August

A "now hiring" sign is posted outside a store in San Francisco.
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A "now hiring" sign is posted outside a store in San Francisco.

Markets will likely start taking notice of the presidential election in August, but the most important catalyst for the month may simply be Friday's jobs report.

Data is key for markets after last week's disappointing initial read on second-quarter GDP sent mixed signals about U.S. economic growth. In the next few weeks, the most scrutinized data release will be the jobs report, which could confirm the U.S. economy is healthy and support the U.S. Federal Reserve's case for raising rates sooner rather than later.

"The past month we saw a meaningful move in nonfarm payrolls," said Andres Jaime, global FX and rates strategist at Barclays. "In order for September to be back on the table, this report needs to confirm the three-month trend is above 150,000."

The data follows a surprisingly strong June employment report and a weak one in May that partly kept the Fed from raising rates in June. In its July meeting statement, the central bank noted strength in the labor market but left rates unchanged without clear indication on the timing of the next hike.

In the meantime, market action has centered on earnings, but by Friday's jobs report, more than 80 percent of the S&P 500 will have reported.

"We're in that transition mode from micro back to the macro," said John Canally, chief economic strategist at LPL Financial. "Stocks have been in a narrow range near all-time highs, and we're looking for a way to bounce. I think a lot's going to be keyed on the path for the Fed."

Fed Chair Janet Yellen is set to speak on August 26 at the central bank's annual conference in Jackson Hole, Wyoming. Major Fed policy announcements have been made at the venue, which Yellen did not attend last year.

"We'll be watching Yellen's speech closely," said Brandon Swensen, co-head of U.S. fixed income at RBC Global Asset Management (U.S.). He's also watching for wage growth in the employment report and any reemergence of market volatility as factors in the Fed's decision on rates.

If volatility "does reemerge, that volatility puts the Fed on hold for really as long as it remains an issue for them," Swensen said.

Market turbulence could pick up as analysts expect increased focus on polls ahead of the U.S. presidential election in November. Hillary Clinton was officially nominated as the Democratic candidate for president last week, while Donald Trump secured the Republican nomination earlier in July.

"I think investors are going to begin to tune in to see what the world will look like under a Clinton administration or under a Trump administration," said Dan Veru, chief investment officer at Palisade Capital Management. He noted that trading in health-care stocks has been more volatile recently.

Clinton plans to keep the Affordable Care Act but has said she will crack down on exorbitantly high drug prices. Trump has called for a repeal of the health-care program. As less predictability exists for Trump's other policies, this year Wall Street has shifted from its historical preference for Republicans to consider a Democratic win a safer result for markets.

"The theme that's emerging is Trump is the chaos candidate for markets. They probably reluctantly want to see Clinton's numbers go up," Canally said.

"That's a potential wild card, watching those poll numbers, particularly out of key states," he said.

Analysts are divided over whether the election necessarily keeps the Fed on hold until at least December. A solid jobs report could tip the balance toward a September or November hike.

"If they get a clear signal from the market and the economy they need to move, they'll do that without a clear indication from the election cycle," said Robert Tipp, chief investment strategist, managing director at Prudential Fixed Income. However, he noted that "a lot of things have to come together that probably won't happen by September. The Fed wants to keep that window open … keep people optimistic about the backdrop."

In addition to the strong June jobs report, encouraging data from major tech firms and banks helped the S&P 500 end July about 3.5 percent higher, after setting record highs in a sharp recovery from post-Brexit losses. The quarter is expected to mark the turning point in a four-quarter streak of year-over-year earnings declines.

Still to post results are major retailers, which struggled last quarter to adapt to changing consumer habits. The SPDR S&P Retail ETF (XRT) fell 9.1 percent for that quarter and consumer discretionary was the worst performer in the S&P 500. The June retail sales report did beat expectations. The July retail sales report is due for release August 12.

"What's tricky about what's going on with retailers [is] clearly retail dollars are being spent in new ways," Veru said.

"A lot of the classic retail stocks have come way, way down and I know there is value there … but you have to pick and choose," he said. "I don't think the dollars are going down. It's just how they're being spent is harder to analyze right now."

To be sure, the focus on economic improvement doesn't preclude what many see as a necessary pullback in stocks that have reached all-time highs.

August has been the worst month for the Dow Jones industrial average and S&P 500, with average declines of 1.3 and 1.0 percent, respectively, for the years from 1988 to 2015, according to the Stock Trader's Almanac. Election years do improve performance, bringing the Dow to the fifth-best month of the year and the S&P to fourth place, according to the almanac's data going back to 1952.

This month also marks the one-year anniversary of the surprise devaluation of the Chinese yuan that sent the three major U.S. indexes more than 6 percent lower for their worst month in at least three years. Another devaluation in January pressured stocks, keeping China at the top of investor concerns.

"There's this lingering angst [around] China. Will they or won't they repeat what they did with their currency?" Canally said.

For now, U.S. stocks have ignored recent weakness in the yuan, even as it hit levels against the dollar not seen in more than five years. Analysts note the gradual pace of depreciation has soothed markets, while lack of Fed action has kept the dollar from rising and alleviated pressure on emerging market currencies.

"It should be different if we get [a devaluation]," Barclays' Jaime said. "It should be focused on heavy slowing in the economy rather than focusing on the FX side."

Concerns about economic slowdown would pressure sentiment around oil prices, which are trading in a technical bear market, or more than 20 percent below their recent intraday high.

As for Brexit, the Bank of England is expected to cut rates Thursday, and traders will watch regional data for indications on economic impact from the vote to leave the EU. But most analysts don't expect major market-moving developments in August. Leadership in the U.K. is settled and the next EU nation to hold a vote that could boost nationalist agendas won't be for a few months.

"From a macro perspective, probably that would be a topic in the fourth quarter," Jaime said.