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The S&P 500 index rose nearly 20% in the first seven months of the year.
NYSE
It seems that nearly every week another firm raises its target for the
S&P 500,
as the bull market charges on. If there’s any chance of late-summer torpor, August is certainly the month for it, but the outlook remains fairly sunny.
The S&P 500 has climbed nearly 20% to 4,589 through the first seven months of the year, and plenty of market commentators expect more gains to come. Just this week, Citigroup said it expects the index to reach 5,000 by the middle of next year, and one well-known bear issued a mea culpa. The rally’s path forward doesn’t look that difficult, given stocks’ recent momentum and the upbeat data behind it.
That said, historically August hasn’t been a month associated with big gains, says Fundstrat’s Tom Lee. Not only are many North American and European investors vacationing—meaning otherwise seemingly trivial news can have an outsize impact on a low-volume market—but the month has a mixed record in recent years, he notes.
Going back to 1950, average returns during August have been just a hair above flat—0.01%—making it one of the worst months of the year. The average drawdown, or decline, over that period is 3.2%, which would imply downside risk to the S&P 500 to roughly 4,430, Lee writes. In more recent history, August 2022 was one of the more brutal months for the index, falling more than 4%.
In fact, the market’s big 2023 advance could raise the specter of a late summer slowdown, as August tends to be a weaker month during historically strong years. When the S&P 500 is up more than 15% through the end of July, the index falls an average of 1.4% in August.
That would imply that investors might face a roadblock this month, however temporary.
But this year’s rally could once again defy expectations, Lee says. He notes that in 2020 and 2021, August saw the S&P 500 climb 7% and 3%, respectively, breaking the historically bearish pattern. Moreover, the next inflation check, the July Consumer Price Index reading on Aug. 10, could deliver a positive surprise, he adds.
“August is worrisome, but the media and many investors have already flagged August as a seasonal risk,” Lee concludes. “The fact that so many are citing this as a risk, actually makes us think this is less likely to be the case as well.”
In other words, don’t cancel that trip to the beach, even if you’ve gotten used to coming back to bad news in years past.
Write to Teresa Rivas at [email protected]
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