by Jason Bodner
August 6, 2024
It’s August… the hottest month of the year, and the last full month of summer. That is, in the Northern hemisphere, as it is winter south of the equator. August has always been a volatile month, though. Back when the Roman calendar had only 10 months, August was the sixth month. Then, around 700 BC it was shoved back to the 8th month to make room for January and February.
The number of days in August shifted around, too. It started with 30 days, then 31, then 29 by order of Pompilius. Then Julius Caesar came along and gave August back its current 31 days.
This volatility of days in August seems fitting for a month filled with volatility. As I write, we are only two days into August and stocks are already whipping around wildly. This makes sense, as a wave of earnings reports, interest rate rhetoric, geopolitical agitation, and election battles heat up.
Before we investors lose our perspectives and our lunches, let’s visit our spirit guide: the data. The quick summary is this: We will all be fine. The summer is a historically volatile time, and election year summers are especially volatile as uncertainty puts additional pressure on the markets, but the fourth quarter historically brings much cheer and higher prices for stocks.
I’ll begin with 34 years of stock market data. Below, you’ll find the average monthly returns for the four major U.S. indexes. It’s clear that August and September are the weakest months of the year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It’s tempting to say that we should probably just close the stock market in late summer every year. It’s a time when liquidity thins out, volatility amps up and all sorts of market mischief happens. Wall Street trading desks also thin out as summer beach houses look more attractive than working.
According to my data, August and September are positive most (about 55%) of the time. Since their average is negative, it’s obvious that their draw-downs are bigger than their gains, but when we look at November and December, we see an average of 73% positive performance in those months.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Well, that’s good but 2024 is also an election year. And there’s a repeating pattern we need to be aware of. Typically, as voting day draws near, volatility increases. Logically, Wall Street hates uncertainty, and if the polls are close, it’s safer to reduce risk until we know the winner. You’ll see in the BMI charts for the last eight election years, the yellow line dips prior to the election and rises after. This represents unusual money flows out of stocks before an election and into stocks after.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
After Trump was shot on July 13, Biden’s chances looked so grim that many said, “It’s over, Trump will win.” That was echoed in the Presidential betting odds, but since Harris threw her hat in the ring, the odds narrowed. The first chart shows the dispersion before Harris, the second after.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The narrower the odds, the more volatility we’ll see….
Now, let’s add the recent earnings volatility to the mix.
According to FactSet: Through last Friday, with 75% of S&P 500 companies reporting, 78% of those companies have reported positive earnings surprises, and their blended year-over-year growth rate is +11.5%, which (if this holds) will be the highest increase since Q4 of 2021.
This also fits history:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Normally, we would look at the Big Money Index (BMI) in relation to the S&P 500, but that masks the real story, which is that many mega-cap bellwethers are priced to perfection. If they slip up even slightly, they get “shot,” as seen by MAG-7 volatility at earnings time. This furthers the large-cap technology unwind and the rush into small caps that we have seen since mid-July.
We now see a modest pullback while money is rushing into stocks (amber line).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, look at the BMI against the large-cap-heavy QQQ (left) and small-cap-heavy IWM (right):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
These two charts tell a totally different story than what the S&P 500 tells us. It becomes even clearer as you see the unusual buy and sell signals mapped against the index ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can also see the massive inflows into small-cap and mid-cap stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see a massive rotation at the sector level, too. New leadership has emerged. Utilities are now our top-ranked sector, racing from #9 of 11 to #1, with Real Estate rising from near the bottom to #4. Technology and energy have fallen. Look at the charts from July 1st to August 1st below.
July 1st 2024 August 1st 2024
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The rotation is clear. Despite the index ugliness of late, there is something very constructive happening in the market. Breadth is improving. We are no longer led by just a handful of stocks. Now we are seeing a major catch-up and normalization of the stock market. In fact, the only visible pain points of weakness at the sector level are Technology and Discretionary. And let’s be honest, they were very extended sectors:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Summer volatility is here, and it’s normal. Rates are set to fall. The election will resolve in November. This will continue the breadth widening, with small-caps catching up. Now is the time to take advantage of deals on stocks. I’d focus on small- and mid-caps with expanding sales, earnings, and profit margins.
Focus on the opportunity, and remember: “Focus is the art of knowing what to ignore” – James Clear
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Jobs Data is Weaker Than Expected
Income Mail by Bryan Perry
The Market Fears the Fed is Behind the Curve Again
Growth Mail by Gary Alexander
The Current Medal Count Between the Big 3 Economies
Global Mail by Ivan Martchev
The Bond Market is Already Cutting Rates for the Fed
Sector Spotlight by Jason Bodner
What Kind of Volatility to Expect, Especially in Election Years
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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