August Vacations and the Stock Market – A Need to Worry?

Tuesday, August 10, 2010

An article in The Wall Street Journal says this August might be a good time to be concerned.

“Typically, the stock market does just fine in August, but every now and then, the month’s evil twin shows up. Given how nervous investors have become about the risk of deflation or renewed recession, they are beginning to worry about which version of August they will get this year.”

(“Fear of a Jolt in Thin August Markets,” by E. S. Browning, August 9, page C-1)

Is there cause to worry?

Sage advice picked on other months

Mark Twain picked October as an especially worrisome month, and we investors would agree given what happened in 1929, 1987 and 2008. Of course, he then added to that choice:

“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”

Was it just random choice that he listed August next to last? Based on activity, there is good reason for doing so. In 9 of the past 10 years, trading volume was below the other months’ average.

Performance, too, is generally tame, with only 1 of 2 down months amounting to anything.

WSJ article doesn’t get the reasons quite right

The article correctly says that August is a popular Wall Street vacation month. That’s true. It’s viewed as a welcome end of the dog days, to be spent away from the city, just before the white clothes are packed away.

However, the article’s continuing rationale for the typical August characteristics and the reason to be concerned is incorrect.

“…stocks tend to drift higher with the A Team out of town.”

The B Team also vacations in August. In addition, the stock market, even trading at an 8o% to 90% level, does not “drift.”

“…if something makes the market fall, the drop can be a doozy.”

The reporter then goes on to mention the following previous August events as examples:

  • 1990 – Iraq invaded Kuwait
  • 1997 – Asian financial crisis
  • 1998 – Russia defaulted
  • 2005 – Hurricane Katrina hit

Did those still at their desks panic, driving the market down more than would have been the case? Hardly. Just because Wall Streeters take vacations doesn’t mean they are out of the picture. If something happens, they will be in the action – to protect their bonuses, if nothing else.

As a final collapse in logic, the article says the August market is in the hands of fast-money, short-term traders, exposing investors to heightened volatility. If so, why does the month tend to be tamer?

So… Yes, the August stock market tends to slow down and calm down – a bit. But if news comes out? Investors will take notice. However, there is no reason to expect an abnormal reaction.

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August 2010