Expect Near-Term Volatility for U.S. Equities?

August 12, 2016

This week’s Chart of the Week examines the pattern of monthly declines for the S&P 500 which are 5% or greater. Data going back to 1945 shows the months of August and September have historically seen the greatest frequency of equity market declines of this magnitude. In fact, nearly one-third of all monthly declines that were 5% or greater occurred during August and September. While historical occurrences such as this do not represent an absolute for equity markets, investors are entering a period that has historically produced below-average returns.

The old adage of “sell in May and go away” did not materialize in 2016, but it is important to remember just how much ground equities have recovered since the substantial drop in equity markets at the start of the year. With a year-to-date return of +7.7% through the end of July, the S&P 500 has advanced +18.8% from its February 11th low. Additionally, the S&P 500 notched seven new closing highs during the month of July. With equity markets continuing to test new all-time closing highs, the historical pattern of consolidation during the third quarter looks to be increasingly probable in the near term.