It might just be a mere coincidence but statistics show that the months of August and September are the worst ones on Wall Street with data going back all the way to WWII. And if that wasn’t bad enough, the numbers show that a third of the monthly declines of 5% or more occurred during these two months.
Since the mid-1990s, August has produced the worst average monthly performance on Wall Street, as measured by the S&P 500. And September is the only month of the year in which the Standard & Poor's 500 index has fallen more often than it has risen in the post-World War II era.
According to analysts, the average August over the past 20 years has seen stocks fall by 1.2%, four times as bad as the average losses in the second-worst month, i.e. September.
Working with these numbers, an investor who owned stocks during August only every year for the past 20 years would have lost 22% of his/her money. August has also suffered some outrageous individual disasters, such as the 15% plunge during the Russian crisis of 1998.
Why?
Explanations abound as to why these months have proven to be so abysmal. Justifications have ranged from the effects of sunspots and lunar cycles to the impatience of investors who tend to give up on underperforming stocks by the end of the third quarter. Another reason given is mutual funds managers who often sell off poor-performing stocks to avoid investor complaints at the end of the fiscal year. Blame is also often attributed to investors themselves for abandoning the big cities in favor of country vacations.
All of these explanations can be justified to some extent, but could there be a less discussed reason for this flawed August investor behavior-- fear of another October stock market crash perhaps? The worst crashes on record, in 1929 and 1987, both came during October. In fact, August saw some of the worst activity during the 2008 financial crisis.
From a psychological point of view, investors start to worry about the possibility of another October crash months earlier and by September, instead of holding out to see the real trend, they are willing to sell out at the first sign of a problem.
By anticipating a dire September, investors look for ways to control the event by setting things up earlier on-i.e. in August. And with lots of people are on vacation in August, there is usually less liquidity in the market and any rush to sell has an exaggerated effect on the market.
Analysts are warning investors to expect this summer to follow the pattern set way back in 1945. U.S. stocks, which have snapped back nearly 19% from February lows, have already posted declines during the first two trading days of August.
But investors should know that stocks struggle in August and September and they should be mentally prepared for the volatility without getting flustered or bailing out.