Opinion: Why August gets no respect from investors
It turns out that the sleepy summer month has one of the best average returns
Courtesy Everett Collection CHAPEL HILL, N.C. (MarketWatch) — August is the Rodney Dangerfield of the calendar: It gets no respect.
That's surprising. Since the Dow Jones Industrial Average DJIA, +0.02% was created in the late 1800s, August has been one of the best-performing months. Its average gain is even better than January's, and yet Wall Street celebrates January's strength by naming a seasonal pattern for it: the January Effect.
Yet no one has ever heard of an August Effect. Why not?
The answer is that most investors' memories are too short to remember years past in which August turned in spectacular performances. With a myopic focus only on recent decades, August does indeed appear to be one of the worst-performing months.
The accompanying chart tells the story.
Notice that August's average return turns from positive to negative upon shifting the time horizon from the Dow's entire history to just the period since 1955.
The only way August deserves its bad reputation would be if something fundamental changed between the early part of the last century and more recent decades that affected August's performance. I am unaware of any such change.
To be sure, when in past years I've written about August, many readers submitted hypotheses that attempt to explain why the stock market's August return would be so much better in the earlier part of the 20th century than in recent decades. But none withstands statistical scrutiny.
For example, many suggested that August is a casualty of the shift of the U.S. economy away from an agrarian economy. But why? August comes well after the point at which farmers would have had to pull money out of the market to pay for planting.
Another suggested hypothesis was that the culprit was the 1976 change in the federal government's fiscal year end from June 30 to Sept. 30. But, again, it's not obvious why that should have any impact on the stock market in August — and, in any case, the month's average performance does not fall off a cliff beginning in that year.
When contemplating whether a statistical pattern is worthy of our attention, it's crucial to see if it exists in other periods besides the one that is the basis of its reputation. Because August's poor performance in recent decades isn't replicated in the early part of the past century, we know that the month's bad reputation isn't deserved.
Other months are a different story. The stock market's average gain in January, for example, is almost identical regardless of whether we focus on the entire period since 1896 or only since 1955.
Notice carefully, however, the story that the chart tells about September. Its average is a big loss, regardless of the time period. That suggests that we make hay while the sun shines: Labor Day is just four weeks away!
Posted by: sarah_oz@yahoo.com
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