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History points to more challenges ahead for the stock market: Morning Brief

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Thursday, September 1, 2022

Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

The historically volatile month of August lived up to its reputation.

The first two weeks were promising, but what's now increasingly looking like a bear market rally quickly flipped into yet another Powell-induced selloff that gave back those gains and more.

Call it par for the course for 2022, as the Federal Reserve's resolve to fight inflation again beat back the most optimistic bulls holding out for the elusive Powell pivot.

By the numbers: The Nasdaq Composite (^IXIC) sank another 4.6% in August — brining its year-to-date return to -24.5%. Meanwhile, the Dow (^DJI) is now off 4,828 points for the year, or 13.2%, and the S&P 500 (^GSPC) is 17% in the hole.

Yahoo Finance dug into what the market history books tell us about years like this and unfortunately for investors, negative returns this far into the year tend to portend more weakness and volatility into year-end.

Market Returns Through August vs. End-of-Year
Market Returns Through August vs. End-of-Year

From 1921 to 2021, the Dow has been negative in 36 years heading into September, with an average return of -7.64% over the year's first 8 months and an additional -1.7% return for the balance of the year. Screening for years when the return was down 8.0% or more through August, the index logged a -5.1% return in the final four months of the year in these 13 instances.

Similarly, performance of the S&P 500 and Nasdaq into year-end is diminished greatly — or turns outright negative — when the indices are down as of the end of August. Critically, volatility also tends to increase when stocks are under pressure into the back-to-school month of September.

September offers no respite for the faint of heart. Since 1950, it is by far the worst-performing month for the S&P 500, with the benchmark index falling an average of -0.54%, according to eToro research.

And October is no picnic either, as some of the more spectacular market meltdowns in history occurred in October, from the great crash of 1929 to Black Monday in 1987.

S&P 500 Average Returns Since 1950 (by Month)
Source: eToro, Bloomberg
S&P 500 Average Returns Since 1950 (by Month) Source: eToro, Bloomberg

The sample sizes are necessarily small, but the trends are instructive. When combined with fall seasonality studies, odds continue to favor a defensive posture at this juncture.

For investors rocked by a disappointing 2022, maintaining cash on the sidelines, trimming positions, or simply sitting on one's hands may be a good strategy for the trigger-happy amid heightened volatility.