August has delivered investors above-average gains over much of the U.S. market’s history
So many investors believe that stocks perform poorly in August that a shrewd contrarian bet would be that the market will be up this month. Moreover, August is typically a positive month for U.S. stocks. In fact, August has been the best month for stocks over much of the U.S. market’s history.
Consider the monthly average returns for the Dow Jones Industrial Average back to its creation in 1896. Over the 90 years until 1986, August was the best-performing month with an average gain of 1.8%, compared to 0.4% for the other months of the calendar.
Yet since 1986 the reverse has been true, with August being the worst month — posting an average loss of 0.7%, versus an average gain of 0.9% for the other months.
Investors who are wary of August’s terrible seasonal tendencies are focusing on this more recent history and ignoring the long-ago record.
There’s nothing magical about 1986, by the way. I chose that as the year to divide the historical sample because that was the end date of an early academic analysis of the Dow’s seasonal tendencies. That study, by Josef Lakonishok of the University of Illinois at Urbana-Champaign, and Seymour Smidt of Cornell University, was entitled “Are Seasonal Anomalies Real? A Ninety-Year Perspective.” It appeared inThe Review of Financial Studiesin 1988 and reported that August was indeed the best month for U.S. stocks, on average.
It perhaps is not surprising that the market’s August’s fortunes turned south almost immediately after that study appeared. Stock market patterns often stop working once too many investors become aware of them.
Investors who bet on August because of that study didn’t read it very carefully, however. The authors wrote that, even though August came out on top in a ranking of average monthly returns up until then, “there is no consistent monthly pattern in the stock market.” Their conclusion is even truer today, of course.
Still, it’s worth noting that, when focusing on all years since 1896, August remains an above-average month. Its average gain is 1.1%, nearly double the 0.6% average for all other months. So if you had to bet on history repeating itself, you’d expect August to be an above-average month for stocks.
The investment lesson from this discussion is the importance of focusing on more than the recent past. It’s human nature to violate this rule, of course; this violation has even been given a name by behavioral economists — “recency bias.” But the long-ago history is no less important.
Always focus on as much data as are available when trying to read historical tea leaves. Upon doing that, you discover that the stock market in August is not, from a strict statistical perspective, destined to be better or worse than average. That doesn’t mean the stock market won’t rise a lot this month — or plunge. But if it does, it won’t be because it’s August.