The month is typically positive in years when the S&P 500 is positive through August
U.S. stock-market investors are staring down what has historically been the worst month of the year for Wall Street, but the strength equities have shown so far in 2018 suggests such weakness may not be repeated this year.
According to Bespoke Investment Group, the seasonal weakness of the month of September is largely an issue of momentum. While the month averages negative returns overall, September tends to be positive in years where the market has been positive going into the month.
While September has indeed been the worst month of the year for stocks, the negativity usually comes during years when the market is already struggling entering the month. That’s simply not the setup in place this year, the firm wrote in a report.
So far this year, the S&P SPX, -0.28% is up 8.5%, while the Dow Jones Industrial Average DJIA, +0.09% is up 5% and the Nasdaq Composite Index COMP, -1.19% is up nearly 17.5%.
Not only is the positive year-to-date move enough to suggest the uptrend could continue over September, but the magnitude of the gain through the end of August also augurs well for trading over the remainder of the year.
According to Bespoke’s data, when the S&P is positive year-to-date through August, the benchmark index averages a gain of 0.2% in September, and then rises an additional 3.38% from September through the rest of the year. When the S&P gains at least 5% in the first eight months of the year, as in the case this year,
the average change in September has been positive again at +0.36%, and the rest-of-year gain is +4.51%.
The real weakness comes in years that are negative going into September.
When the S&P has been in the red through August, September has seen an average decline of 3.43%,”Bespoke wrote.
When the index has been down 5%+ YTD through August, September has averaged a decline of 3.78%.
The month of September arrives at a time when both the S&P and the Nasdaq have risen for five straight months, rallies that have taken them to repeated records of late. The Dow is less than 3% below its own record.
According to the Stock Trader’s Almanac, September has historically been the worst month of the year for all the major indexes, including the Dow, the S&P 500, the Nasdaq, and both the Russell 1000 RUI, -0.33% and the Russell 2000 index RUT, -0.33% of small-capitalization shares.
On average, the Dow falls 0.8% over the course of the month, or 1% in midterm election years, as 2018 is. The S&P drops 0.5%, typically, as does the Nasdaq. (For midterm years, the average shifts to a decline of 0.4% for the S&P and 0.8% for the Nasdaq.)
Although the economy is still quite strong, and stocks are marking hew highs, this doesn’t mean some usual September volatility is out of the question—in fact, we’d be surprised if volatility didn’t pick up given midterm years tend to see big moves in the months leading up to the November election, said Ryan Detrick, senior market strategist at LPL Financial.