The stock market is about to enter its worst month of the year after a historic August — but that doesn't mean investors should sell stock, LPL says
- After a historic August, the stock market is about to enter its worth month of the year on average, according to a note from
LPLpublished on Monday.
- The S&P 500 posted a gain of more than 7% in the month of August, marking its best return for the month since 1984, LPL said.
- But investors shouldn't expect these gains to continue into the months of September and October, given that during election years, both months tend to be weak as investors divert focus to a November election.
- On top of that, when the S&P 500 was up more than 5% in August in 1986 and 2000, the market fell 8.5% and 5.4% in the following month, respectively, LPL said.
- Despite the seasonal weakness, investors should use any dips in the market as opportunities to add to their longer-term core stock holdings, LPL said.
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The stock market has experienced a surge in August, but investors shouldn't expect the gains to continue, at least not for the next two months, LPL said in a note published on Monday.
The S&P 500 is up more than 7% in the month of August, marking its best return for the month since 1984, according to LPL.
This represents the first August on record that saw two separate six-day win streaks, LPL observed.
But what follows a strong August tends to be a weak September.
Since 1950, September has been the worst month of the year for
Read more: US Investing Championship hopeful Matthew Caruso landed a 382% return in the first half of 2020. He shares the unique twist he's putting on a classic trading strategy — and 3 stocks he's holding right now.
LPL's chief market strategist, Ryan Detrick, said "the last two times August was up more than 5% were 1986 and 2000, the S&P 500 fell 8.5% and 5.4% in September those years [respectively]."
But election year throws a wrench into the average monthly market returns as measured by the S&P 500.
During election years, both September and October tend to be weak months as investors prepare for an uncertain presidential election.
"What caught our attention was both September and October have a negative return during election years, with October the worst month of the year," Detrick added.
During election years, the S&P 500 returned an average decline of -0.2% in September and -0.7% in October during election years, according to LPL.
Despite the historical weakness in stocks for the months of September and October during election years, especially after a strong August, investors shouldn't sell their stocks now. Instead, they should do the opposite, LPL said.
While noting that the current rally in stocks is "extremely stretched," Detrick recommended investors should "continue to use any pullbacks as an opportunity to add to longer-term core equity holdings, as the economy continues to come back quicker than most expected," the note concluded.
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