The surprise summer rally continues, as the S&P 500 Index is on pace to gain for a fourth consecutive month. In fact, should July close in the green, over the past 21 months, the S&P 500 has closed higher all but three times. Here is the catch: The calendar is something we should not ignore, as August and September are two of the weakest months historically and they are coming up next.
As stated in our recently released Midyear Outlook 2018: The Plot Thickens, one of the three major themes we are looking for over the rest of this year is volatility (with fiscal policy and peaks being the other two). Right on cue, here comes the one month where "when it's down, it's really down."
"Maybe it's the back-to-school blues, but since 1980, there is no month with a worse average return when it is lower than August," explained LPL Research Senior Market Strategist Ryan Detrick.
Look at the recent history of August: Iraq invaded Kuwait in 1990, 1997 and 1998 both saw big drops in August over the "Asian Contagion" and the implosion of Long-Term Capital Management (LTCM), 2010 saw a big drop as worries over the global economy spread, 2011 had the U.S. debt downgrade, and 2015 was the China currency issues and a 1,000 Dow drop. Pick a reason why, but August seems to have these big events that cause trouble.
As our LPL Chart of the Day shows, August has a penchant for large drops.
We continue to expect stock market gains of 10%+ when all is said and done in 2018, thanks to the benefits of fiscal policy and strong corporate profits, suitable investors may consider using any potential late summer weakness as an opportunity to add to risk.