Investors Brace for Slashed Profits After Sunny Summer of Record Highs

The downdraft of the market in August, highlighted by today's massive plunge as the U.S.-China trade war escalates, is likely to be the beginning of more turmoil in the coming months, according to CFRA strategist Sam Stovall in a new report. Stock investors should brace themselves for a period that has historically seen total returns for many asset classes evaporate or plunge in August and September, Stovall says. Indeed, weakening corporate earnings, the slowing economy and the escalating, protracted U.S.-China trade conflict could worsen that historical downtrend.

“The market has entered a traditionally challenging two-month period in which multiple asset classes have recorded their weakest advances or outright declines, on average,” wrote Stovall. “[H]istory reminds us that we should gird ourselves for potentially disappointing returns this month, not only for the S&P 500, but also for a variety of other asset classes.”

What it Means for Investors

Since 1970, August and September have been among the worst months for a range of market indices. On average, the S&P 500 has recorded a scant 0.1% total return for the month of August and -0.6% for September. Over the same period, the Nasdaq Composite has posted 0.3% and -0.5% for both months respectively, and the MSCI-EM index, -1.8% and -0.3%, respectively. 

Bucking the trend, the S&P GSCI Index, a commodity futures index, and the Barclay’s Aggregate Bond Index have demonstrated strong gains during the month of August since 1970. For both indices, August was the month where they have generally posted among their strongest monthly gains, according to Stovall.

While history is generally not on the market’s side, the present weakness began after the Federal Reserve announced its decision to cut interest rates by 25 basis points last Wednesday. While the rate cut was highly anticipated and expected to be supportive of the market’s rally, the Fed’s comments concerning future monetary policy were perceived as not dovish enough. 

The market has been dealt another major blow by the Trump administration’s announcement to impose tariffs on the remaining $300 billion worth of imports from China, and China’s subsequent devaluation of the Yuan to offset the impact of those tariffs.

The S&P 1500, a broad market index that includes large, mid-cap, and small cap stocks, was down through the first two days of August, taking down nine of 11 sectors with it. Energy, financials and industrials led the plunge. Further, as much as 83% of the 146 sub-industries in the S&P 1500 saw price declines, led by computer & electronic retail, diversified chemicals and oil & gas drilling. Monday's massive sell-off will steepen those declines for the month.

Looking Ahead

To be sure, Stovall reminds his clients that, “all is not lost, as there is always a bull market someplace.” He notes that there are nine sub-industries in the S&P 1500 that meet five of his selection criteria, implying further gains ahead. That optimism may be of scant solace to investors if the market continues the major descent that it's made thus far in August.