Wednesday, August 26, 2015

After a Down August, What Happens Next?

With equity markets going from bad to ugly in just a matter of days, one has to wonder what the near-term future has in store. So far this month the S&P 500 has plummeted -11.2%, putting this August on track to be the second worst performing month since the start of 2005. Topping the list is the month of October 2008 with a -16.9% return and currently in second place is February 2009 at -11%. The fact that performance this month is as awful as some of the worst months during the catastrophic market meltdown of 2008 into early 2009 helps to put this correction into proper perspective.

We're accustomed to thinking that September and October are typically more tumultuous months than August, but it's not true. On average over the last twenty years, August has fared worse than September or October, as have June and July. Summer months have been less than kind to investors and tends to support the "sell in May, go away" refrain.

Given this month is more than likely (!) to be negative, what has happened after down Augusts?

To answer this question, I looked at S&P 500 monthly returns for the last 30 years (1985-2014). In that time, the S&P 500 experienced 13 negative Augusts, shown below.

The average decline was -4.7% for those August months.

For the years that had a negative August, how did the rest of the year fare? Answer: quite well. Over the next four months (September-December), the S&P 500 rose by an average of 9.2%, not bad! Also note that the September-December returns were positive for all years, an impressive 13-0 hit rate.

The usual caveats apply (the sample size is limited, this time may be different, past performance does not guarantee future results, etc.), but given the painful price action and scary headlines of late, it's at least somewhat reassuring to know that the near-term future can be bright(er).