As summer hits a midpoint heading into August, it’s important for investors to know the historical significance that the month brings, particularly when it comes to the S&P 500. As such, it’s important to watch ETFs that track the index, such as the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard S&P 500 ETF (NYSEArca: VOO).
Sam Stovall, Chief Investment Strategist at CFRA Research, warns investors that August is a time to keep the S&P 500 under their investment radars with respect to volatility. A deep rise or deep decline could be in store, but should not necessarily deter investors from heavy market oscillations.
“Since WWII, the S&P 500 gained about 1%, on average, in July of midterm election years, but then stumbled in August, ranking it among the three worst months,” said Stovall. “The deepest August slump was in 1998, when the S&P 500 tumbled 14.6% in response to the losses endured by the hedge fund Long Term Capital Management. August also witnessed the second-highest rise of any month at 11.6%, in 1982, as the market began its 1982-87 bull run. Today, history says that investors should prepare for, but not necessarily run from, an increase in volatility.”
Looking at the year-to-date chart, the S&P 500 peaked at 2,872.87 on January 26 before taking a dive to 2,581 on February 8. Since then, it has slogged its way back to 2,846.07 on July 25 and will be re-testing its January 26 ceiling, which August could reveal.
“Despite an end-of-month social media meltdown, investors may still be willing to stick with a momentum strategy,” said Stovall. “A hypothetical portfolio of an equal weighting to each of the top 10 S&P 500 sub-industries based on trailing 52-week price returns, rebalanced monthly, has outpaced the “500” on a MYD and YTD basis. In addition, the portfolio gained 13.6% per year vs. 8.1% for the S&P 500 and beat the broader market in 71% of all calendar years since 1991.”
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Stovall recommends investors research sub-industries with the highest 12-month trailing returns to extract maximum benefit in what could be a volatile August.
“The S&P 500 sub-industries with the highest 12-month trailing return include: Application Software, Department Stores, Diversified Support Services, Electronic Equipment & Instruments, Health Care Facilities, Human Resource & Employment Services, Internet & Direct Marketing Retail, Oil & Gas Refining & Marketing, Railroads and Trading Companies & Distributors,” said Stovall.
Tracking SPY, IVV and VOO will provide investors with the more broad-based exposure to the index itself–SPY is up 2.52% YTD, IVV is up 2.51% YTD and VOO is up 2.65% YTD based on Yahoo! Finance performance numbers.
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