Investors: Don't Sweat the Dreaded Month of August
After the market staged an impressive recovery off of its swoon during the first two months of 2016, and then weathered the UK's June Brexit vote, we are mindful that August tends to be trying for investors’ patience.
The S&P 500, for example, posted losses in 3 out of the last 5. This often leads investors to think that August is negative for stocks — which over longer periods of times, is in fact, not the case [1]. In fact, in 10 out of the last 15 years, August was actually positive for US stocks. However, Augusts do tend to be more volatile than other months, with more sudden market swings.
That's why we think it’s useful for investors to understand why August tends to be more volatile, and why they shouldn’t put too much faith in short-term market moves, especially during the dog days of summer.
"...it only takes two people to reset the current market price of a publicly traded stock. One Buyer. One Seller. "
Believe it or not, it has to do with vacation. In the financial industry, with fewe people at their desks, vacations tend to keep trading volumes light in August. This in turn can lead to larger price movements in markets. Why is this the case? Simply put — because any “good” news tends to be exaggerated by the limited number of traders buying, and any “bad” news tends to be blown out of proportion by the limited number traders selling.
Remember — it only takes two people to reset the current market price of a publicly traded stock. One Buyer. One Seller. And when there are fewer people buying and selling overall, just like in real estate, the market price can temporarily diverge from fair value. As such, reduced volumes lead investors to falsely assume sell-offs or quick run-ups in stock prices are more lasting than they tend to be. Once everyone comes back from the beach, and gets back to work — prices tend to normalize again.
The key to weathering August as an investor is to keep a steady hand, and not pay much attention to short-term volatility. If the market goes down, use it as a time to rebalance. Remember, market moves in August (and September for that matter) are often overblown.
So, our advice for August is quite simple. Get outdoors, and enjoy the summer weather!
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Footnotes:
[1] Standard & Poors, S&P 500 Dow Jones Indices.
See Disclosures.