Stock markets are holding true to form in August by heading south

The stock market has plenty of excuses for its recent roller-coaster ride that has left it about 3% below the record high it touched in late July.

President Donald Trump escalated a trade war with new tariffs on Chinese imports and Beijing retaliated by devaluing its currency. The Federal Reserve cut interest rates last month but not as much as investors hoped. And in response to a dim outlook for the global economy, U.S. bond yields tumbled and overseas central banks lowered rates.

 Then there’s this: It’s August.

Over the past decade, August has been the worst month for stocks, and this year is no exception..

“This is when bad things tend to happen to the stock market,” says Ryan Detrick, senior market strategist for LPL Financial.

So far this month, the Standard & Poor’s 500 index had dipped 1.4%, and the Dow Jones industrial average has slipped 1.8%, even after the Dow erased a 589-point drop Wednesday and surged 371 points Thursday. Yet while the S&P 500 is down from its all-time high, it’s still up 17.1% for the year.

That means if you invested $100,000 in an S&P index fund at the start if the year, it would be worth around $117,100 today, down from a peak of about $120,700 on July 26.

Since 2009, the S&P 500 has averaged a 0.78% loss in August, making it the worst-performing month during the 10-year period, according to LPL. A big reason, the firm notes, is that tumultuous events have occurred in August. Among them: Iraq’s invasion of Kuwait in 1990; the Asian financial crisis in 1997; the Russian debt crisis and Long-Term Capital Management collapse in 1998; the U.S. credit rating downgrade in 2011; and the Chinese currency crisis in 2015.

“There’s no larger reason why random events happen in August but they seem to,” Detrick says.

But bad luck isn’t the only factor. “We tend to do different things in the summer,” says Jeffrey Hirsch, editor of the Stock Trader’s Almanac. “There’s less trading and less activity in the market.”

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As a result, when Wall Street pros sell stocks, there are fewer buyers around to limit the drop in prices, says Paul Hickey, co-founder of Bespoke Investment Group.

That’s the case even when no major news events are roiling markets, Hirsch says.

When global shocks do happen, “It can make a bad situation even worse” by exaggerating any sell-off, Hickey says.

Other forces may also be at work. Investment fund managers often start selling poorly performing stocks in the third quarter as they start trying to bolster their overall results for the year, Hirsch says.

And a market that has performed strongly the first half of the year, as it has in 2019, is often due for a pullback by August, Detrick says. Since 1983, in the 13 years when the S&P 500 was up at least 10% the first seven months of the year, it averaged a 0.89% slide in August, according to Bespoke. By contrast, when the broad stock index turned in a smaller gain or a loss through July, it notched a smaller loss or a gain in August.

Over a longer time frame – 50 years – August is the third weakest month for stocks behind September and June. September often spells trouble because investment fund managers do even more unloading of bad stocks and bull markets tend to run out of steam, the analysts say.

The good news is that a bull market usually recovers from the August doldrums. Since 1928, when the S&P 500 is up through July, it averages a 4% gain the rest of the year, according to Bespoke, a good sign for this year’s generally strong advances so far. When the broad index is down through July, it slips another 1.73% the rest of the year.

But Detrick says it’s too early for investors to view the recent fall as a buying opportunity because there’s likely more volatility to come. “We don’t think it’s over quite yet,” he says.

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Typically, August starts off with a decline and levels off after a week or so, according to a Bespoke analysis. That may be staying true to form, with Thursday’s 371-point jump. But since 2009, the latter part of the month has brought more turbulence, The U.S. trade war with China and the slowing global economy are likely to continue to rile stocks in the near term, Detrick says.

But by later this year, he expects at least some kind of truce in the trade fight and generally healthy consumer spending and economic growth to propel stocks higher.

LPL, he says, has maintained its year-end target of 3,000 for the S&P 500, just a whisker below its late July high.