Strong summer end often leads to stock market turbulence in early fall

The S&P 500 is on track for its fourth consecutive monthly gain, rising 2.2% in July and an anticipated 2% in August. However, historical patterns suggest a challenging September, which typically averages a 0.7% decline and is historically the worst month for the index. This risk is amplified when July and August both see gains exceeding 2%, with September averaging a 1% decline in such instances and often preceding negative Octobers. While Jeffrey Hirsch of the Stock Trader's Almanac warns of a potential late summer/early fall selloff, he anticipates any pullback to be short-lived, maintaining a full-year gain outlook of 12-20%.

Analysis

The S&P 500 is concluding a strong summer rally, poised for its fourth consecutive monthly advance after gaining 2.2% in July and an estimated 2% in August. However, historical seasonality presents a significant headwind, as September is typically the worst-performing month of the year with an average decline of 0.7%, according to the Stock Trader's Almanac. This risk is amplified by the market's recent strength; in years when both July and August saw gains exceeding 2%, the average September loss has historically deepened to 1%, with the index finishing lower in 8 of those 11 instances since 1949. Furthermore, this pattern has often preceded weakness in October, which was negative in 7 of those 11 years with an average loss of 2.9%. While Jeffrey Hirsch of the Almanac acknowledges the potential for a 'late summer/early fall selloff' based on these precedents, he frames any such pullback as a transient event. He maintains a bullish outlook for the full year, reaffirming a best-case scenario of 12% to 20% gains for the index.

Key Decisions for Investors

• Investors should prepare for heightened volatility and a potential market pullback in September and October, making it prudent to consider tactical hedging or trimming some profits from the summer rally.
• Long-term investors may view any market weakness in the coming two months as a potential buying opportunity, aligning with the analyst's expectation that any selloff will be short-lived and the full-year outlook remains positive.
• Monitor market performance closely through the third quarter to assess if the historical seasonal weakness materializes, as a shallow correction would be consistent with the expert's bullish base case of 12-20% full-year gains.