It’s August now, the time usually known as the “dog days” of summer, due to its heat and lethargy. Does that term apply to the stock market as well? Is August stock market performance unique?
Securities markets don’t take vacations, of course. But people do, and they tend to do so in August. That means average trading volume tends to go down during the weeks when many investors and traders are reading their Kindles in the Hamptons.
The nagging concern for the beachgoers, though, is that lighter volume can have the effect of magnifying price movements. We saw this in August 2011 when negotiations over the extension of the U.S. debt ceiling broke down and Standard & Poor’s revoked its AAA rating of U.S. government debt. The S&P 500 lost nearly 20% before rebounding in the early fall.
The August Stock Market Effect
This vulnerability to unexpected price movements has increased in recent summers, in no small part due to the expanded role that non-human decision makers play in daily trading volume. Over 60% of the average daily trading volume on U.S. security exchanges is machine-driven: these are the high frequency trading systems programmed to react automatically to different market signals without any cognitive human input. These programs can flood the market with buy or sell orders, so on low volume days the effect can be dramatic.
Moreover, the way many of these computerized trading algorithms work is to react to sudden price movements by increasing the order size. Say, for example, that a program is set to unleash a wave of sell orders based on a specified percentage increase in the 10-year Treasury note yield. When those sell orders happen, other trading programs detect a sudden price drop in the stock market and issue their own sell orders. Other programs feed off that new information and a massive sell-off can materialize in a very short amount of time.
Devote August to Reviewing Your Investing Goals
As a long-term, goals-oriented investor, you shouldn’t be too concerned about whatever short-term gyrations are going on during this low volume month. But it can be a good time to take stock of your investment priorities for the rest of the year.
Labor Day will be here before you know it, and that means back-to-school and back to the usual busy pace. It’s a great time to look ahead – for example, to give thought to any tax harvesting opportunities, to think about your asset allocation decisions for the next year, and to make sure things are up to date in your 401(k) or 529 plans or other investment vehicles.
Successful long-term investing requires periodic tending to keep everything on track and in line with your goals and changing time horizon as you move through different lifecycle phases. Take advantage of August’s dog days for some productive maintenance on your investment strategy. And don’t worry too much about the short-term movements that we might see this month.
Does the stock market make strange moves in August? Tell us what you think.
For advice and tools to manage your investment strategy throughout all seasons, visit Jemstep.com.