What the story says about September and the stock market after the summer bounce is running out

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A summer U.S. stock market rally from year-to-date lows seen in June stalled in August, leaving major indexes with monthly losses as investors braced for the start of a traditionally unpleasant month for stock bulls.

Since 1950, September has been the worst performing month of the year for the Dow Jones Industrial Average DJIA,
-0.88%,
S&P 500 SPX,
-0.78%
and Russell 1000 RUI,
-0.77%
and worst for the Nasdaq Composite COMP,
-0.56%
since 1971 and the small-cap Russell 2000 RUT,
-0.62%
since 1979, Jeff Hirsch, editor of the Stock Trader’s Almanac, noted in a blog post.

But what happened in August? The first half of the month had momentum. After confirming a June bear market with a slide of more than 20% below its Jan. 3 record high, the S&P 500 rebounded from its June 16 low. The rally strengthened in July and extended into August, overcoming a series of technical hurdles that had prompted market watchers to weigh in on whether the rally might be shaping up to be more than a typical bear-market rally.

The 200-day moving average, however, appeared to be a bridge too far. After ending at a near four-month high on Aug. 16, the S&P 500 has been off the long-term average.

On the macro front, signs of peaking inflation created notions of a policy pivot by the Federal Reserve, with officials pausing and then starting to ease rate hikes in 2023, and were credited with providing a boost to stocks. Fed officials have pushed back on that scenario, and last Friday, Chairman Jerome Powell sent a clear message that interest rates were likely to move higher and stay high for longer, even if that resulted in economic distress.

So stocks on Wednesday, the last trading day of the month, suffered their fourth straight loss, leaving the S&P 500 down 4.2% for the month, the Dow down 4.1% and the Nasdaq down 4.6% for August. The S&P 500 is down 17% year-to-date, while the Dow is down 13.3% and the Nasdaq is down 24.5%.

Stocks looked set to pick up where August left off on Thursday, with index futures pointing to a lower start for Wall Street.

Deep dive: Here are the worst (and best) performing stocks of August and 2022

September has often provided even more of a seasonal headwind in years when stocks have been down year-to-date heading into August, analysts at Bespoke Investment Group said in a note Wednesday, citing the S&P 500’s performance since 1928.

“When the S&P was down YTD (year-to-date) through the end of August (as it is this year), the index was down 3.4% on average in September, while September was flat when the index was up YTD within the month,” they wrote. “For the rest of the year, the index averaged a 1.2% loss coming into September with YTD losses and a 3.3% gain coming into September YTD. (See diagram below).

Bespoke Investment Group

The market’s weak performance in September shows a “remarkable consistency,” MarketWatch’s Mark Hulbert wrote in an Aug. 23 column. The problem for traders, however, is that the cause—if there is one—remains a mystery, which makes placing bets based solely on the pattern a dubious proposition.

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