History points to more challenges ahead for the stock market: Morning Brief

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Thursday, September 1, 2022

Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

The historically volatile month of August lived up to its reputation.

The first two weeks were promising, but what's now increasingly looking like a bear market rally quickly flipped into yet another Powell-induced selloff that gave back those gains and more.

Call it par for the course for 2022, as the Federal Reserve's resolve to fight inflation again beat back the most optimistic bulls holding out for the elusive Powell pivot.


By the numbers: The Nasdaq Composite (^IXIC) sank another 4.6% in August — brining its year-to-date return to -24.5%. Meanwhile, the Dow (^DJI) is now off 4,828 points for the year, or 13.2%, and the S&P 500 (^GSPC) is 17% in the hole.

Yahoo Finance dug into what the market history books tell us about years like this and unfortunately for investors, negative returns this far into the year tend to portend more weakness and volatility into year-end.

Market Returns Through August vs. End-of-Year
Market Returns Through August vs. End-of-Year

From 1921 to 2021, the Dow has been negative in 36 years heading into September, with an average return of -7.64% over the year's first 8 months and an additional -1.7% return for the balance of the year. Screening for years when the return was down 8.0% or more through August, the index logged a -5.1% return in the final four months of the year in these 13 instances.

Similarly, performance of the S&P 500 and Nasdaq into year-end is diminished greatly — or turns outright negative — when the indices are down as of the end of August. Critically, volatility also tends to increase when stocks are under pressure into the back-to-school month of September.

September offers no respite for the faint of heart. Since 1950, it is by far the worst-performing month for the S&P 500, with the benchmark index falling an average of -0.54%, according to eToro research.

And October is no picnic either, as some of the more spectacular market meltdowns in history occurred in October, from the great crash of 1929 to Black Monday in 1987.

S&P 500 Average Returns Since 1950 (by Month)
Source: eToro, Bloomberg
S&P 500 Average Returns Since 1950 (by Month) Source: eToro, Bloomberg

The sample sizes are necessarily small, but the trends are instructive. When combined with fall seasonality studies, odds continue to favor a defensive posture at this juncture.

For investors rocked by a disappointing 2022, maintaining cash on the sidelines, trimming positions, or simply sitting on one's hands may be a good strategy for the trigger-happy amid heightened volatility.

Also keep in mind that if 2022 were to end positive, this outcome would be necessitated by a volatile rally that could still whipsaw and frustrate investors.

But it's not all bad on the seasonality front.

Mid-term election years tend to trade sideways through the fall and see a rally into year-end, according to Ryan Detrick, chief market strategist at Carson Group.

Mid-term Election Year Markets Seasonality
Mid-term Election Year Markets Seasonality

Of course, the election this year has been a bit of a sideshow for investors, as it seems the only thing market participants care about now are inflation stats, and how the Fed will react to them.

This means there are two key dates to watch in the final month of the third quarter: September 13, when August consumer inflation numbers drop, and September 16, when the Fed announces its next rate decision.

Nestled in between those two dates is monthly and quarterly options expiration on Friday, September 19. The 4,000 level in the S&P 500 has been in play over the last two sessions — a level that also happens to have the largest concentration of options expiring in three weeks. Due to technicalities of the options market, any selling below this level will tend to get magnified.

Add in the fact that liquidity is still abnormally low by historical standards with traders standing on the sidelines, and there is the potential for a bigger move lower in stocks. If the S&P 500 can't hold 3,800, that puts 3,200 in the cards, which would be a nearly 20% decline from Wednesday's close.

Conversely, if investors can white-knuckle it through the next three weeks without a major meltdown, market headwinds may give way to tailwinds.

Perhaps resulting in the fourth quarter being punctuated by a well-received visit from Saint Nick himself.

What to Watch Today

Economic calendar

  • 7:30 a.m. ET: Challenger Job Cuts, year-over-year, August (36.3% during prior month)

  • 8:30 a.m. ET: Initial Jobless Claims, week ended August 27 (248,000 expected, 243,000 during prior week)

  • 8:30 a.m. ET: Continuing Claims, week ended August 20 (1.438 million expected, 1.415 million during prior week)

  • 8:30 a.m. ET: Nonfarm Productivity, Q2 final (-4.5% expected, -4.6% during prior month)

  • 9:45 a.m. ET: S&P Global U.S. Composite PMI, August final (51.3 expected, 51.3 during prior month)

  • 10:00 a.m. ET: Construction Spending, month-over-month, July (-0.4% expected, -1.1% during prior month)

  • 10:00 a.m. ET: ISM Manufacturing, August (52.0 expected, 52.8 during prior month)

  • 10:00 a.m. ET: ISM Prices Paid, March (55.5 expected, 60.0 during prior month)

  • 10:00 a.m. ET: ISM New Orders, August (48.0 during prior month)

  • 10:00 a.m. ET: ISM Employment, August (49.0 expected, 49.9 during prior month)

  • 7:00 p.m. ET: WARDS Total Vehicle Sales, August (13.30 million expected, 13.35 million prior month)


  • Lululemon Athletica (LULU), Broadcom (AVGO), Campbell Soup (CPB), Ciena (CIEN), Genesco (GCO), Hormel Foods (HRL), JOANN (JOAN), Ollie’s Bargain Outlet (OLLI), SecureWorks (SCWX), Signet Jewelers (SIG), Sportsman's Warehouse (SPWH), Toro (TTC), Weibo (WB)

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