Friday, September 23, 2016

We Got Through August & September, Now What?

As we write this, the S&P 500 sits at 2,170 which happens to be the exact price at which the index finished August and just 3 points below July's closing level of 2,173.

If you've been around the market long enough, you know that the summer months have a tendency to be the market's worst.  Traders go on vacation, volume shrinks and volatility goes up.  In fact, over the last 20 years, August and September have been the two worst months for stocks with August being especially rough.

This year however we've bucked that trend a bit.  In August, the S&P was essentially unchanged and so far in September stocks have bounced back from the mid-month dip to hover back where August ended.  Like a starting pitcher scuffling through the 3, 4 and 5-hitters in a lineup but escaping unscathed, the market is on the verge of wrapping up its seasonally toughest period in perfectly fine fashion.

As of yesterday's close, the S&P was actually above where July finished (2,173) and will go into next week with a great chance of ending the August-September period with positive performance.  With that in mind, we took a look back at the last 20 years to see how similar scenarios had played out.  We found that since 1996, the chances of the market being up from July 31st through the end of September were exactly 50%.  As shown below, in the 10 instances where the market was positive during this period the market went on to post an average gain of 4.15% over the remainder of the year.  Surprisingly enough, when the S&P was down during August-September the index managed to post even higher gains into year-end with an average Q4 return of 6.26%.  That extra performance came with greater volatility though with an average Q4 drawdown during those years of almost -8%.

We then took the study a step further and wondered what the results looked like during years, like 2016 (barring a disaster next week), where the S&P is up year-to-date through September and the results are even more encouraging.  In both cases, the index finishes out the year with better returns and less downside volatility.

With the election coming and the holidays after that, we'll definitely be hearing a lot of seasonality talk between now and year-end but perhaps the results from August and September hold the clues for what's in store the rest of the year...

We'll revisit this post once September has come to a close.

Have a great weekend.