Outlook for the S&P 500: Bright Days Ahead

Despite the possibility of a slow August, it seems like every week brings a new target for the S&P 500 as the bull market continues to charge forward. With a remarkable climb of nearly 20% to 4,589 in the first seven months of this year, there is a general consensus among market commentators that there are more gains to come.

Citigroup recently predicted that the index will reach 5,000 by the middle of next year, and even a well-known bear has admitted their mistake. With stocks' strong momentum and encouraging data supporting the rally, the path ahead appears relatively straightforward.

However, history shows that August has not typically been a month associated with significant gains. As Tom Lee from Fundstrat points out, many North American and European investors are on vacation during this time, which can lead to seemingly insignificant news causing disproportionate effects on a low-volume market. Furthermore, August's track record in recent years has been mixed.

In summary, while the outlook remains fairly sunny for the S&P 500, it is worth considering the unique challenges that August brings. However, given the recent upward trend and positive data, there is optimism that the bull market will continue to forge ahead.

The Historical Performance of August in the Stock Market

August has historically been one of the most challenging months for investors, with average returns barely above flat. Dating back to 1950, the average return during August has been a mere 0.01%, positioning it as one of the worst months of the year. Over that period, the average drawdown or decline has been 3.2%, suggesting potential downside risk for the S&P 500, with a probable level of approximately 4,430.

Recent history further highlights the difficulties faced in August. In 2022, this particular month proved to be quite brutal for the stock market index, experiencing a decline of over 4%. This worrisome trend raises concerns that the market's significant advancement seen in 2023 may result in a late summer slowdown. August typically exhibits weakness during historically strong years, especially when the S&P 500 registers a gain of over 15% by the end of July. On average, the index has fallen 1.4% in August under these circumstances. Hence, investors may encounter a temporary roadblock this month.

Nonetheless, there is hope for a different outcome in 2023, according to analyst Lee. He points out that both in 2020 and 2021, August witnessed noteworthy growth in the S&P 500, with gains of 7% and 3% respectively. This breaks the bearish pattern usually associated with this time of the year. Additionally, Lee suggests that a positive surprise could be in store with the upcoming inflation check—the July Consumer Price Index reading on August 10.

While August does present reasons for concern, it is worth noting that the media and many investors have already acknowledged August as a seasonal risk. Interestingly, this widespread recognition actually leads Lee to believe that the likelihood of facing such adversity may be reduced. Therefore, there is potential for August to defy expectations and deliver positive performance once again.

Don't Cancel That Trip to the Beach!

Don't let previous bad news discourage you from enjoying a well-deserved trip to the beach. Spend quality time in the sun, sand, and surf without worries.