It’s been a bumpy ride for markets this summer, but investors might want to wait a little longer before buying the dip in any ailing stocks that they’re eyeing.
Stocks have whipsawed in recent weeks as investors digest the latest developments in the Middle East and an ongoing rotation in the AI trade. But the stock market is now heading into a period of the year that often comes with a deeper slump, with the late summer months typically seeing some of the worst returns for the S&P 500, strategists on Wall Street are warning.
Bank of America flagged that the August to October period has long been the worst three-month stretch for stocks. Dating back to 1928, the S&P 500 saw an average loss of 0.02% during that period, with the average correction in down years being 7.35%, strategists wrote.
The period typically favors a “defensive bias” among investors, the bank added.
Across global stocks, market losses are particularly acute in the August and September period. Since 1987, the MSCI All Countries World Index has seen an average absolute return of 1.7% during that period, the lowest out of any other two-month stretch, according to an analysis from Ned Davis Research.
Strategists at the research firm pointed to two headwinds in particular that could add to the downward pressure on stocks in the month ahead:
First, energy prices and bond yields are rising, a toxic combo for stocks.
Energy costs and yields rising in tandem have preceded major market corrections in the past, strategists wrote on Monday, pointing out that both increased in periods leading up to the bear markets in 1987, 1990, and 2022.
“Not a positive omen with August just ahead,” the firm wrote. “If a consistent bearish warning is provided by our major models, it will be time to head for the exits.”
The fear has been that higher energy prices could stoke inflation, boosting the odds for higher interest rates.
Second, the late summer period has historically been weak at this point in the second year of a presidential cycle.
Other analysts on Wall Street have flagged this phenomenon, with the run-up to the midterm elections being known as a historically weak period for stocks.
In all midterm years since 1974, the S&P 500 has seen a median return of 0% from August 1st through the election day in November, strategists at Goldman Sachs wrote in a note on Friday.
September tends to be the worst month of the year for the S&P 500, with the index shedding an average 1.3%, JPMorgan’s market intelligence desk wrote in a note on Monday.
Forecasters have turned more cautious on the market lately, particularly as momentum begins to break down in some high-flying stocks. Chip and memory stocks, sectors of the wider AI trade that have been in the spotlight this year, have floundered as investors take profits and flock to less volatile areas of the market.
The S&P 500 and Nasdaq 100 recently slipped below their 50-day moving averages, a possible technical signal for upcoming weakness.
There’s a silver lining, though: late summer could contain one of the best buy-the-dip opportunities.
Stock returns have generally improved after the midterm election, with mutual funds and foreign investors generally increasing their allocation to stocks, Goldman said.
The October to December period is one of the strongest stretches of the year for markets, with stocks gaining 74% of the time since 1928, per Bank of America’s analysis.
“A seasonal dip in Aug-October may present a buying opportunity if technical signals support,” BofA strategists wrote. “A weak Aug-Oct can favor selling/hedging risk in a July-Aug before a strong Nov-Jan period,” they added wrote.