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Lucky July, Scary October and the mirage of market timing

Lucky July, Scary October and the mirage of market timingPhoto from Unsplash

Originally Posted On: https://www.empower.com/the-currency/money/lucky-july

 

Lucky July, Scary October and the mirage of market timing

 

Investors are usually fond of July, but this year it seems their love is unrequited. Historically, whether averaged since 1950, over the past 20 years, the past 10 years or the past five, the S&P 500 has generated positive returns in July – an average jump of 4% over the past five years.1 But as July 2024 nears its end, it looks like a serious letdown. After climbing the first half of the month, the market has given up all its gains for July and more. On July 24, the market experienced its worse day since 2022, with the big tech stocks that are developing artificial intelligence – which led the market up the first half of the year – now leading the way down.

What gives? Obviously, historical averages are no guarantee of positive returns over any given time frame. Specifically, rising concern about the huge expense to develop AI without revenue to balance that kicked in, the market started moving into smaller stocks – likely to benefit more from falling interest rates than large companies with plenty of cash – and some disappointing corporate earnings reports weighed on a pricey market. The point: Things happen. Many of those things, as well as their timing, are impossible to predict.

Spooky season

Next up on the calendar? Perhaps you’re frightened of October. Its fearsome reputation is not entirely undeserved: October has seen many of the most spectacular market crashes. These include 1987, when the S&P sank by 20.5% on Oct. 192 – its largest single-day drop ever in percentage terms – and two consecutive days in 1929, Oct. 28 and 29, when the S&P dove 12.3% and 10.1%, respectively.2 Yet on average, October has delivered positive returns historically – higher average returns than those produced by the “January effect,” another historically positive month.

You’re probably less familiar with the September effect, but by historical averages, September is actually the worst month of the year for stocks. The S&P 500 has dropped an average of 4% in September over the past five years, and an average of 3% over the past 10 years.2

So, should you panic in August and pull your money out of the market? No. Emphatically no.

There are many reasons that it’s inadvisable to try to time the market, even setting aside the inevitable trading costs and potential tax liabilities you could generate by excessive trading of your investments. For one thing, those historical averages can mask a lot of ups and downs.

The January effect

Take the January effect: Yes, historically stocks experience a modest bump on average. But during the 20 years from 2000 to 2019, January results were positive 10 times and negative 10 times.1 For any given year, this is a coin toss.

Another reason to avoid timing: Academic research indicates that as these “market anomalies” become known and widely incorporated into trading algorithms, these effects tend to dissipate, so you may be chasing a fading mirage.3

But here’s the central reason timing the market this way is effectively impossible: Over long periods stocks make much of their gains on relatively few spectacular trading days. The cost of missing the market’s best days can be higher than the gain from avoiding the worst days.

Don’t fear the roller-coaster

Obviously, if you could avoid only the worst days for the market, it would improve your returns. The problem: The best and worst days tend to be tightly clustered in time, even on consecutive days, because they both show up during periods of high market volatility.

For instance, take the fall of 2008: On Sept. 29, the S&P 500 dropped by almost 9%.2 On Oct. 13, it shot up almost 11.6%, on Oct. 15 it fell 9%, and on Oct. 28 it climbed 10.8%.2 Quite a roller-coaster.

Or consider March 2020: On Mar. 12, as the seriousness of Covid sank in, the S&P dropped 9.5%. On the 13th, it bounced, up 9.3%. On the 16th, it dropped almost 12%, then on the 24th, it climbed 9.4%.2

For the vast majority of investors, the best option during such periods is to buckle your seatbelt, leave your investments in place and hang on for the ride. Never sell out of panic.

Besides, you wouldn’t want to miss November. By historical averages, it’s the best month of the year for the market.

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