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Perspectives from Above the Noise -- Week of August 1, 2016

Perspectives from Above the Noise -- Week of August 1, 2016

August 02, 2016

Despite ending Friday within two points of its 2,175.03 historical high, the S&P 500 posted a small loss last week, snapping four consecutive weekly gains. The benchmark equity index advanced 3.69% in July, its fifth monthly gain, and has rallied 8.82% from its June 27th post-Brexit low. Technology shares led the advance, surging 13.11% since the late-June low. Last week’s focus was on second quarter earnings and a disappointing reading of second quarter growth. With more than half of S&P 500 companies having reported quarterly results, overall earnings are now expected to decline 3.8% from a year earlier, according to Fact Set. A week earlier, when 126 S&P 500 firms had reported, analysts had projected a 4.4% earnings decline and before the earnings season start, analysts originally forecast a 5.3% pullback in profits. Key among economic data last week was Friday’s lackluster preliminary growth report for the second quarter.

For the week, the S&P 500 slipped -0.05%, the Dow Industrials fell -0.75%, and the EAFE (developed international) added +2.38%.

What We’re Reading 

European Stocks Down After Stress Test -- Reuters

Early 2Q GDP Reading Misses Forecast -- Fox Business

NY Fed Head Urges Caution About Rate Hikes -- Reuters

Chart of the Week: S&P’s Sign Post: August, September May Challenge Investors’ Emotions


August and September have traditionally been the worst months for stock-price returns. Maybe it’s because of reduced capital inflows, vacations, upcoming earnings reality, and Mutual Funds’ fiscal year-end window dressing. Whatever the reasons, the results are unmistakable. August and September have recorded the worst two average price performances since 1945. According to S&P Global Market Intelligence U.S. Equity Strategist Sam Stovall, “while the S&P 500 rose in price in nearly 60% of all months, it advanced only 54% of the time in August and fell more times than it rose in September.”

In the S&P/Dow Jones’ chart above, Stovall alerts that August and September are ranked 11 and 12 in terms of monthly price increases since WWII. They recorded the 2nd and 3rd deepest single-month declines and are in the top 1/3rd of monthly volatility. Also, the S&P 500 recorded one-third of all monthly declines of 5% or more in August and September. Only October 1987’s drop of 21.8% and October 2008’s slump of 16.9% were worse.

This review is historical and actual results are not always gospel. However, S&P’s Sam Stovall’s admonition is that investors who are aware that the market traditionally stumbles during these two months are less likely to become their portfolios’ worst enemies by reacting emotionally. Rather, as Stovall observes, investors are more often than not better off buying than bailing.

Articles chosen and summarized by the Cetera Investment Management team. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.