More than 200 years of data show stocks typically gain in August, while market volatility sits well below average
The "dog days of summer" have a reputation for being a challenging time on Wall Street.
Stocks usually perform well in August, contrary to the widespread belief that it's one of the worst months of the year.
To cite just one example, Barron's recently quoted an analyst saying that the stock market on average declines during August. That is actually not the case, as you can see from the chart below.
Regardless of whether you focus on the S&P 500 SPX since its creation in 1957, the Dow Jones Industrial Average DJIA since its creation in 1896, or the broader stock market since 1793 (as reported in the database compiled by Edward McQuarrie, an emeritus professor at Santa Clara University), the stock market's average August return is positive.
And as the chart further shows, looking at the Dow since 1896 and the full stock-market sample since 1793, August's average return in fact is higher than the average of the other 11 months of the calendar.
The difference between August's average return and that of the other months is not big enough to be deemed significant at the 95% confidence level that statisticians often use when assessing whether a pattern is genuine. But being even modestly above average is still a far cry from declaring that August is a losing month for the stock market.
The dog days are over
A related Wall Street belief that also is unsupported by past data is that the stock market is especially volatile during August. When the months are ranked according to their average VIX VIX level, August comes in eighth. In other words, August's volatility is below average.
It's not clear how Wall Street came up with this mistaken view. No doubt, a shameless data miner can torture the data long enough to get it to support any conclusion. But absent a theoretical reason to focus only on a subset of all-available data, such a focus will almost certainly be misleading.
Perhaps there's a theoretical reason to believe August will be a poor performer for investors. The only one I'm aware of is that August comes during the so-called dog days of summer, when trading volume is relatively light. And though this argument appears plausible, its statistical foundation is weak.
Consider a meta review of past academic studies on the relationship between trading volume and stock prices. The conclusion: There is "mixed evidence on the direction of the influence of security trading volume on security returns (i.e., positive versus negative effect), and vice versa."
Specifically, five of 13 studies found that trading volume had a negative relationship with future returns, while another five found a positive relationship. The remaining three found that the volume-price relationship was "nonmonotonic," meaning that it isn't stable - sometimes positive and sometimes negative. So good luck trying to use trading volume to time the market.
The bottom line? The stock market in August may decline and may be more volatile than average. But if that happens, it won't be because of the calendar.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
(END) Dow Jones Newswires
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