Don't Be Fooled by the Quiet August Myth

By

Published July 27, 2012

| FOXBusiness

August is known for being a dead quiet month on Wall Street. Trading volumes evaporate as U.S. market participants hit the beach, Europe gives itself a solid four-week vacation and few major corporate events are scheduled.

But a quick check of history reveals that the month of August is littered with both positive and negative events that are, in retrospect, quite significant for investors.

For example, Hurricane Katrina wreaked havoc on New Orleans and oil markets in August of 2005 and Fed chief Ben Bernanke unveiled plans for a new round of quantitative easing in August 2010.

According to S&P Capital IQ, August ranks as the third-worst month for the S&P 500 since 1945, contracting an average of 0.07% and plunging as much as 14.6% in 1998.

“If you look at history, you have one major disaster after another in August,” said Jim Rickards, a partner at New York-based hedge fund JAC Capital Advisors. “It just destroys the myth that we all go to the beach and see you on Labor Day.”

Markets Won’t Wait for September

But history also shows August can be a very positive month for investors, at least during election years. Since 1900, August has produced an average return of 2.7% for the S&P 500, making it the best performing month by a wide margin, according to S&P.

“While many investors will be spending the month of August at the beach, the financial markets will not necessarily wait for vacations to end and the kids to be back in school before making a material move,” Scott Wren, senior equity strategist at Wells Fargo’s (WFC) Wells Fargo Advisors, wrote in a note.

The best August occurred in 1982 when the Paul Volcker-led Federal Reserve started to cut interest rates, kicking off the secular bull market that lasted until 2000.

"There’s a chance we could have some turbulence time in August," said Sam Stovall, chief investment strategist at S&P Capital IQ. "Don’t allow your emotions to get the better of your portfolio. Positive things can happen and as a result go with the flow.

Part of the reason why August has produced large moves in the markets is a drop-off in trading volume, which can create volatility.

According to data provided by the New York Stock Exchange, since 2004 average daily trading volume in August stood at 2.38 billion shares, down 2% from the average in all other months. While that may not sound like much, it represents a reduction of about 48.5 million shares a day.

“Thin trading volume and a lack of interested participants can easily add up to unexpected large moves in the financial markets when headlines hit the tape,” said Wren, who pointed out that less experienced traders are often managing trading desks during August.

Geopolitics, Hurricanes Dominate August

Investors who skipped town back in August of 1998 would have missed the eruption of the Russian financial crisis on August 17. The ensuing turmoil led to Russia defaulting on its debt, sent the S&P 500 careening nearly 15% lower and helped speed the implosion of hedge fund Long-Term Capital Management, where Rickards served as general counsel.

Other major geopolitical events that moved the markets also happened in August, including the attempted coup in Russia against Mikhail Gorbachev in 1991 and Saddam Hussein’s invasion of Kuwait in 1990.

Likewise, August 7, 1998 brought the U.S. embassy bombings in Tanzania and Kenya by Al-Qaeda that killed 223 and served as a prelude to the Sept. 11 attacks three years later.

August also features the start of hurricane season, which reared its ugly head in a big way in August 1992 with Hurricane Andrew, which caused an estimated $26.5 billion in damage. Hurricane Katrina rattled the global markets in August 2005, causing the deaths of nearly 2,000 people and $1.08 trillion in damage.

Fed in Focus in August

More recently, the subprime crisis began to gain steam in the summer of 2007, prompting some prominent market observers to begin pleading with Bernanke to open the discount window and slash interest rates that August.

A year later, August gave investors a final opportunity to get out of the markets before the Wall Street implosion erupted in September, leading to the downfall of Lehman Brothers and bailout of American International Group (AIG).

In 2010 as the U.S. recovery began showing serious cracks, Bernanke used an August 27 speech at Jackson Hole, Wyoming, to unveil plans for QE2, a simulative measure featuring $600 billion of bond buying.

Last year as the world held its breath, Congress reached a last-minute deal on August 2 to raise the debt ceiling to $14.694 trillion and avert a calamitous default on U.S. debt. 

What Will Move the Markets This August?

As the aforementioned list of random events suggests, this August could bring significant developments in any number of different theaters.

On the positive side, China could report meaningful improvement in growth or Bernanke could unleash the long-awaited QE3 to prevent the U.S. economy from slipping into a recession.

Also, the Republican National Convention is slated for August 27 in Tampa and could change the current odds over which party will control the White House after November.

Then again, the list of potential negative outcomes seems quite longer, including anything from a spilling over of violence in Syria to neighboring countries to negative growth in the July jobs report due out next week. It’s also positive the never-ending debt crisis in Europe could see a further intensification, prompting the bailout of Spain.

“Do not get too complacent, the summer doldrums could suddenly come to an end when most market participants least expect,” said Wren.

URL

http://www.foxbusiness.com/investing/2012/07/27/debunking-quiet-august-myth/