Although August is historically a sleepy month for stocks, over the past four weeks the market has enjoyed an extraordinary run, hitting several new record highs—but historical data shows that the next few months could prove problematic for investors.
KEY FACTS
On Monday, the stock market wrapped up its best August since 1984 as the S&P 500 jumped more than 7%, hit new record highs and fully erased its losses from the coronavirus pandemic.
Over the past month, corporate earnings have come in better than expected, stimulus talks collapsed but everyone still expects a deal, and coronavirus numbers in the U.S. have declined somewhat, explains Tom Essaye, founder of the Sevens Report, in a note.
But solid corporate earnings have come at the cost of cutting budget and layoffs, “and if that doesn’t change, it will start to wear on the economy in the coming months and quarters,” he says.
Investors should “be aware September is indeed the worst month of the year on average” going back to 1950, says Ryan Detrick, chief market strategist for LPL Financial.
The last two times the market rose more than 5% in August were in 1986 and 2000 when the S&P proceeded to fall 8.5% and 5.4%, respectively, in September, according to LPL’s data.
Detrick also warns that growing uncertainty over the 2020 presidential election could also come into play: “Both September and October have a negative return during election years, with October the worst month of the year.”
This month’s gains have pushed the stock market to record levels, officially ending the 2020 bear market and starting a new bull market. August’s blowout rally saw the S&P 500 and Dow Jones Industrial Average both fully recover their losses amid the coronavirus pandemic. Since the market’s sharp rebound from its March 23 low point, the Dow and S&P are both up more than 55%.
Surprising fact
The more than 35% gain for the S&P 500 since April is the strongest five-month run for the index since 1938, according to data from Bespoke Investment Group.
Crucial quote
A double-dip recession in early 2021 is still “more possible than most people realize,” says Essaye. “The U.S. is not out of the woods economically until mid-2021, I think.”
Chief critic
While all of the major indexes saw solid gains in August, the driving factors behind the market rally have been the same ones powering the tape for months, says Vital Knowledge founder Adam Crisafulli. “While fundamental conditions are much better than they were back in March and April, multiple expansions (not higher earnings estimates) is still accounting for the bulk of the market’s advance,” he says.
What to watch for
Stimulus, especially the historic level of support from the Federal Reserve, “has supported the initial phase of the road to recovery, but the fiscal stalemate in Washington puts the economic recovery at a crossroad,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. Another coronavirus stimulus bill was expected in mid-August, but lawmakers in Congress have been deadlocked for weeks over the size and provisions of the next relief package. An agreement now looks unlikely until at least late September.
This article originally appeared on Forbes.
