Judging by the 70-degree weather we’ve been having in here in Chicago, it’s hard to believe that August is starting tomorrow. But the calendar does not lie. For summer enthusiasts living in northern climates, the month represents the last chance to enjoy long hours of daylight and wear shorts outside. For investors, August has a different connotation.
August was the best month of the year for stocks during the first half of the 20th century. Mark Hulbert published a column on MarketWatch saying the month remains one of the better ones when the entire history of the Dow is considered. Using data from 1896 through 2013, Hulbert calculates an average August return of 1.13% for the Dow. This is the fourth-highest return of any month. Jeff Hirsch at the Stock Trader’s Almanac says that August’s performance is a tale of two long periods. While August was a great month between 1901 and 1951, it hasn’t been since. The Dow has experienced an average decline of -0.1% since 1950. The negative return makes August the fourth-worst-performing month.
Note the size of the decline: -0.1%. It’s not anywhere close to being big enough to justify the transaction and tax costs you could incur from pulling out of the market. In fact, most daily fluctuations in the Dow are larger. The danger, of course, is incurring a decline of greater than 0.1%. Big drops have occurred in August before. A combination of events, including the Long-Term Capital Management implosion, led to a 15.1% drop in 1998. Saddam Hussein triggered a 10% slide in 1990 when he invaded Kuwait. More recently, the sovereign debt crisis in Europe led to a 4.4% slide in 2011.