Here's What Happened in the Stock Market in July -- and What to Watch in August

July was a pretty strong month for the stock market, with most major indexes finishing in positive territory, and with considerably lower volatility along the way than in other recent months. Despite the continued elevated coronavirus case numbers, the S&P 500 is now in the green for 2020, fueled by generally strong earnings from the largest U.S. companies and hopes that a vaccine will be available by the end of the year.

Here's a look at the stock market's performance in July, as well as some of the major trends that shaped its performance over the past month and that could determine what your investments do in August and beyond.

The stock market had another strong month in July, continuing the recent rally. Image source: Getty Images.

How did the stock market perform in July?

Before we take a look at the main investing themes from July, here's a quick look at how the major benchmarks performed for the month, and how they've done so far in 2020.

Data source: YCharts. Performance through June 30. YTD = year to date.

A couple of key takeaways here. First, the S&P 500 is now positive for the year. When you consider that the index had fallen by more than 40% from its pre-pandemic highs in March, that's a pretty stellar rebound. And while the Nasdaq remains the biggest winner of 2020, as many big tech stocks benefited from the stay-at-home economy, its performance in July was in line with most other key benchmarks.

Virus numbers remain high

In June, coronavirus case numbers soared as the U.S. economy reopened. In July, many states took action -- pausing or even rolling back reopening plans, implementing mask mandates, and more. Even many political leaders who had been resistant to the idea of face coverings have started to embrace the idea.

Well, the good news is that cases seem to have leveled off -- for now at least.

US Coronavirus Cases Per Day data by YCharts

I wouldn't go so far to say this is a positive catalyst for stocks, but it's certainly a good development. Cases remain elevated, but if they begin to fall in August, it could help the market's rally continue. Plus, a vaccine is still on track to be available by the end of 2020, and any news on this front is likely to be a market mover.

GDP was bad -- or was it?

We knew that second-quarter GDP would be bad. After all, many parts of the U.S. economy were essentially nonfunctional for much of April and May. So, it shouldn't be too much of a shock that second quarter-GDP contracted by 32.9% -- the worst quarterly performance ever. The service sector was the largest contributor to the plunge, as you might expect.

However, it's worth pointing out that this is slightly better than the 34.7% decline economists were expecting, so the market largely shrugged off the numbers.

On the other hand, unemployment remains elevated and initial unemployment claims are rising. About 1.4 million people filed for unemployment in the last full week of July, the second straight weekly increase. So far, most news on the unemployment front has been positive, so it's worth keeping an eye on these numbers going forward, as further increases could put investors on edge.

Earnings season ended the month on a high note

Since the U.S. economy slowed dramatically in the second quarter, we knew corporate earnings would generally be bad, but so far there haven't been many negative surprises. In fact, the opposite has been true in many cases.

The big banks kicked off earnings season in mid-July, and most institutions reported rather strong results. While all big banks set aside billions in anticipation of loan losses, actual charge-offs and delinquencies remain quite manageable. And investment banking has been a big positive surprise -- JPMorgan Chase (JPM -0.40%) reported stellar investment banking results and Goldman Sachs (GS 1.78%) achieved its second-highest quarterly revenue ever.

Megacap tech stocks have also reported surprisingly strong results. The "big four" tech stocks -- Facebook (META -1.12%), Amazon (AMZN -1.11%), Apple (AAPL -0.81%), and Alphabet (GOOGL 0.69%) (GOOG 0.56%) -- all reported better-than-expected results. Apple beat sales expectations by a wide margin and declared a 4-for-1 stock split. And Amazon reported an absolute blowout quarter, as the pandemic provided a big tailwind for online shopping -- in fact, sales jumped by roughly 50% year over year on the e-commerce platform.

Stimulus worried are keeping investors on edge

Finally, it's important to note that we're ending the month with more questions than answers on the economic front, particularly in regard to the highly anticipated stimulus package being negotiated in Congress.

The $600 weekly unemployment boost is arguably the biggest issue that could affect the stock market. States stopped paying out the extra cash after last week, and lawmakers have yet to reach any sort of compromise to extend it. With about 30 million people relying on this additional income to make ends meet, it's fair to say that any prolonged gap in benefits could have serious consequences for the economy -- and for the stock market.