Investors who are anxious about a potential stock-market pullback should strongly consider taking their portfolio on a vacation in August, according to Fundstrat Global Advisors’ Tom Lee.
Lee — one of a handful of high-profile Wall Street analysts who anticipated the market’s 2023 rebound — said in his latest note to clients on Monday that investors should be “wary” of a market pullback in August given historical performance trends and the already-stretched nature of the market’s 2023 performance.
To support his case, Lee rattled off a batch of performance factoids, including:
- Since 1950, the average return for the month of August has been just 0.01%, making it one of the worst months for stock-market returns.
- During that period, the “win ratio” for the month has been only 55%.
- When stocks fall in August, the average drawdown is 3.2%. That would imply roughly 150 points of downside for the S&P 500, Lee said.
Another interesting caveat: stock-market underperformance in August worsens when the S&P 500
SPX,
has gained more than 15% through the end of July.
- Average return falls to -1.4%.
- S&P 500’s win ratio declines to 40%.
- Average drawdown swells to -3.5%.
To be sure, stocks recorded substantial gains in August 2020 (+7% for the S&P 500, according to FactSet data) and August 2021 (+2.9%). But the market reverted back to underperformance in August 2022, when the S&P 500 fell 4.2% as Federal Reserve Chairman Jerome Powell disabused investors of the notion that the central bank might soon pause, or reverse, its inflation-fighting interest-rate hikes.
Even if one were to ignore the seasonal trends, many investors feel that the market seems overdue for a pullback given the S&P 500’s nearly 20% march higher since the start of 2023. But in light of past performance, Lee feels widespread wariness could result in a self-fulfilling prophecy.
“So, it seems that the stronger the year, the worse the August risk. What does this mean? It means one needs to respect the negative seasonal going into August,” Lee said in a note to clients.
“Moreover, as I mentioned, it does seem like many investors tend to be wary of the month.
That said, Lee argued that the financial media and many investors have already flagged the seasonl risk, which could make a downturn less likely to be the case. The bottom line, Lee wrote, is that the market setup for August is “tough,” but that Fundstrat sees the pullbacks as likely to be “shallow.”
Indeed, Lee isn’t the only one who has taken note of these seasonal trends lately.
MarketWatch’s Mark Hulbert offered up a similar conclusion earlier this month, when he pointed out in a column that August has been the worst month for stocks over the past few decades — although he added that, based on returns of the Dow Jones Industrial Average, that hasn’t always been the case.
“If the 36 years since 1986 were all that statisticians had to go on, they would conclude that August’s underperformance was significant at the 95% confidence level — just the opposite of the conclusion that emerges from the 90 years prior,” Hulbert said.
See: August used to be the best month for the stock market. Then it became the worst.
Since launching Fundstrat in 2014 following a lengthy stint as an equity analyst at JPMorgan Chase & Co., Lee has burnished his reputation as a stock-market permabull, while also making headlines for long-shot calls like his claim that bitcoin could rise to $200,000 per coin in the years ahead.
Like many on Wall Street, Lee failed to anticipate last year’s selloff. But heading into 2023, his year-end price target of 4,750 was one of the highest on Wall Street.
Earlier this month, Lee accomplished a rare feat: nailing a one-week call for the S&P 500 to gain 100 points by anticipating that the June CPI report would come in softer than expected.
See: S&P 500 could surge 100 points this week on inflation data, says Fundstrat’s Lee
Monday is the final trading session of July, and all three major U.S. stock-market averages are on track to log strong gains, with the S&P 500 and Nasdaq Composite on track for a fifth straight month in the green — the longest such streak for the S&P 500 since August 2021, when the index rose for a seventh straight month.
The large-cap index has risen 3.1% in July so far as of 11 a.m. Eastern Time on Monday. Meanwhile, the Nasdaq Composite
COMP,
is on track for a monthly gain of nearly 4.1%, while the Dow
DJIA,
has risen by 3.2%, largely thanks to a historic 13-day winning streak that ended last week.
This story originally appeared on Marketwatch
