How Bad Was August on the Market?

Newfound Research |

Recently, in reference to August 2015, this headline appeared on a major news site: “Wall Street drops more than 6% in worst month since '12

Looking purely at monthly statistics can be a lot like looking at YTD numbers: why should the clock reset at the end of each month?

A more prudent approach would be to look at rolling returns over the past 21 days (the number of trading days that were in August).

From this, we see that SPY had a 21-day drop of more than 6% in late September/early October (“Septober”) of 2014.

A 6% monthly decline has not been a frequent event in recent history, but it is not as rare as “since ‘12” would make us think. To properly evaluate statistics, we must have proper context.

Why is 6% special? Is there that much difference between 6% and 5.85%? We saw a 5.85% drop earlier this year.

Furthermore, a drop of 6% may not bode as poorly as news headlines hint at. After both of those periods, May 2012 and Septober 2014, SPY retraced its steps to end either up or nearly flat over the cumulative two-month period. We do not make forward market predictions and this time may very well be different. However, the past does show that a 6% drop in and of itself is not reason to panic.

In fact, since the post-financial crisis bottom in SPY on March 9, 2009, a period over which SPY was up nearly 20% per year, one of every twenty-five rolling 21-day returns was less than 6%. So for the last 6+ years, a 6% correction was not a cue to sell, but rather an opportunity to add equity exposure at a more reasonable price.

While looking at a rolling return provides a more robust view of performance than fixed period (e.g. monthly) returns, rolling returns are not perfect. They gloss over everything that happened within the timeframe. Here are some recent periods that ended down around 6% over a month.

August 2015 was steady for the first half of the month and bounced down to -11% before rebounding to -6%.

September 2014 was a relatively consistent decline.

May 2012 dropped more quickly and leveled off.

And August 2011 plummeted down, bounced back to wipe out half the losses, and then promptly fell back to the lows of earlier in the month before recovering to end the month at -6%. 

Yes the market did decline more in August 2015 than any other calendar month since 2012. Facts are facts. But not all facts are useful, and without a more comprehensive picture, some may lead to emotional decisions that can derail the best-laid risk-management plans.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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