What investors should do in 'danger zone' months

Analyst explains why August and September are prone to market drops

What investors should do in 'danger zone' months

Investors should handle the “danger zone” months with care as the markets enter their most vulnerable period.

Brooke Thackray, research analyst at Horizons ETFs, said that August and September have been the weakest months of the year for the S&P 500 from 1950 to 2017. During this period, August has produced an average 0.1% loss and been positive only 54% of the time, while September fared even worse, producing an average 0.5% loss and positive just 44% of the time.

There have been only two instances of the S&P 500 producing a greater return than 10% in this period – 1982 and 1985 – with the first being at the start of the biggest bull run in history, coming immediately after a recession and with interest rates dropping from 20%. In comparison, Thackray points out that there have been six instances of the S&P 500 producing a loss greater than 10% during the same period.

He added that while more than half the time the returns are positive, this is when large drops tend to occur. He added that current high valuations, the extended bull market and lower expectations for future growth earnings make the market more prone to a drop, although none of these are catalysts that prove this is definitely going to happen.

Thackray said there are a number of reasons why the investment world stalls during these two months.

He said: “A lot of retail investors aren’t active in the market this time of year so volume dries up a little. Also, retail investors tend to trim up their equity holdings in summer time. They are going on holiday so they take some risk off the table and that process helps push the stock market a little bit because they are selling equities, basically.”

He also highlighted the cyclical nature of the economy, large companies shutting down for the summer and analysts lowering expectations as other contributory factors. He said: “Add all these things together and there is more risk to the market place; there is not huge excitement to be pushing it up.”

For investors, Thackray believs this is not a time to be chasing beta but did add that a big drop may represent an opportunity.

He said: “This is a time period where you don’t want to take on huge amounts of risk and it’s not the time where you think this is an opportunity to be jumping into the market, increasing beta and really pushing that up.

“But on the flipside, a large drop in the market at this time can present an excellent opportunity. We’ve seen that a number of times, especially if you go back to December, 2015. We saw that big drop when the Chinese yuan got revalued – that was an excellent opportunity to be stepping into the market.

“So although it’s the danger zone, it’s also an opportunity, for those who have reduced their risk, that if the market drops they can increase risk and buy at a lower value.”

 

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