Don’t get too comfortable in your hammock. As the dog days of summer approach, investors find multiple risks nipping at their heels.

The typical summer lull was conspicuously absent in the markets last week. Instead, the final week of July was a whirlwind, packed with a barrage of earnings reports, a Federal Reserve policy meeting, and critical labor-market data.

The Fed maintained steady interest rates last week, even as Fed Chair Jerome Powell acknowledged increasing risks to the labor market. Meanwhile, corporate earnings generally surpassed expectations, yet stock prices have declined since the onset of the second-quarter earnings season.

Concerns about economic growth have reversed the recent trend towards cyclicals and small-cap stocks, while artificial intelligence (AI) favorites saw their largest declines of the year. Wall Street is starting to doubt the wisdom of Big Tech’s massive AI investments.

The Fed Approaches an Easing Cycle

Following the most aggressive tightening cycle in four decades and the second-longest pause in history, the Fed has indicated that an easing cycle is on the horizon.

Over the past two-and-a-half years, COVID-induced inflation has been the primary focus, but as the Fed edges closer to achieving stable prices, attention is shifting to the labor market and maximum employment.

Last week, the Fed left its policy rate unchanged at 5.25% – 5.50% and signaled the growing likelihood of a September rate cut. Powell suggested that while inflation control remains incomplete, the Fed can begin to ease.

With inflation trending towards the Fed’s 2% target and rising concerns about the labor market, Wall Street anticipates two or three rate cuts this year, compared to the single cut projected in June.

The Slowing Labor Market Raises Concerns

The U.S. labor market has been cooling, transitioning from overheated conditions. However, recent data points, including the July payrolls report, have stoked worries. The report showed the addition of 114,000 jobs, falling short of expectations, and an increase in the unemployment rate from 4.1% in June to 4.3% in July.

Despite these figures, I believe employment conditions remain healthy for several reasons.

Payroll gains have averaged 170,000 over the past three months, aligning with pre-pandemic averages. The unemployment rate, while higher, is still historically low. In fact, unemployment hasn’t been this low since 1969, when Richard Nixon was in the White House. The recent rise in unemployment is due to an increased labor force rather than a drop in employment.

Yield Curve: Potential End to Inversion

For over two years, the yield curve has been inverted, reflecting restrictive Fed policy. However, with the Fed hinting at easing interest rates, bond markets are anticipating a more aggressive rate-cutting cycle. This has led to a rally in bond prices and a drop in yields.

Short-term yields are poised to fall faster than long-term yields, helping to normalize the yield curve. A smart move now would be to overweight duration, favoring intermediate and long-term bonds.

Improving Market Breadth

Amid the recent rotation away from growth stocks, mega-cap tech stocks have gotten clobbered. Despite strong earnings reports from major tech firms, their stock prices did not rise due to high expectations.

The tech-heavy NASDAQ has entered correction territory, signaling investor impatience with gigantic bets on AI. While AI is positioned to drive growth over the next decade, there’s a lag between costs and returns.

These factors converged to drive U.S. equities lower last week, as this chart shows:

The twin assassinations of Hezbollah and Hamas leaders last week in the Middle East initially drove crude oil prices higher, but subsequent data showing a sputtering economy caused oil prices to reverse course and head lower. A slowing economy suggests energy demand destruction.

Volatility was low in the first half of the year, but market fluctuations have accelerated in H2. In the coming weeks, concerns about the timing of Fed rate cuts and election-related uncertainty are likely to drive volatility. Wall Street is now expecting a half a percent cut when the Fed next meets in September, up from the usual quarter-point cut.

Historically, the period from August to October is challenging for stocks. We’re also in the midst of a bitter U.S. presidential race. Don’t put your portfolio on automatic pilot, just because it’s August.

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Robert Rapier is the chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert is one of the world’s foremost experts on energy and income investing, but his deep knowledge also extends into other profitable segments, such as AI.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.