August Stock Bloodbath?

Dear Rich Lifer,

Many of you may know the old financial adage “sell in May and go away,” which advises investors to divest their holdings in May, before the historically underperforming summer months, and then reinvest in October. 

The phrase reportedly originated from an old English saying, “Sell in May and go away, and come back on St. Leger’s Day.” This refers to the custom of English bankers, aristocrats and merchants who fled the city to escape the heat during the summer. Leger’s Day refers to the St. Leger’s Stakes, a horse race that took place in mid-September. 

The adage has been passed down through time, and now we find ourselves at the beginning of the worst month of the dreaded summer slump: August.

According to data going back to 1928 produced by Bank of America analyst Stephen Suttmeier, August is the worst year of the month for the stock market.

Today, we will explore the data behind this ominous month and share some advice on how to keep your portfolio safe until the heat burns off and the fall brings a more prosperous market.

Beware of August 

Suttmeier dug through the data to bring us a warning… Beware of August.

He discovered that, since 1928, the S&P 500 index had an average return of negative 0.03% in August, September, and October, making these three months the worst of the year for the big-cap benchmark and the only three-month period that averages in red. 

He further unearthed that August is nestled snugly between the best and worst months of the year: Jubilant July and Stormy September. 

July averages a 1.58% return on the S&P 500, with positive results 59.1% of the time. Meanwhile, September averages a negative 1.03%, with positive results less than half of the time, or 45%.

This July, we witnessed an even stronger than average month; the S&P 500 gaining 2.27% and saw its sixth consecutive month of increases for the index. 

According to statistics from Dow Jones, this makes the stretch the longest positive streak since September 2018, with a cumulative increase of 18.34%. 

Now let’s turn to August’s record…

We find a more lackluster result: an average 0.70% S&P 500 return and positive results 58.1% of the time, signifying a transition from the “summer rip” to the “fall dip.” 

Suttmeier also discovered that the deadly summer period is coupled with an increase in volatility. The Cboe Volatility Index, or VIX, has seen spikes from August-October, going back to 1992. Conversely, the April-July period historically has very limited volatility. 

Couple historically low returns and increased volatility with the rapidly spreading Delta variant of the coronavirus, and things look pretty bleak for investing this month. 

However, not all is lost; there are ways to protect your portfolio during this tumultuous time and maybe even snag a winning stock…

Rotate, Rotate, Rotate 

According to an analysis by the Center for Financial Research and Analysis (CFRA), rotating your portfolio can be a better play than selling and running away from the markets in May.

CFRA research shows that since 1990, there has been a clear division in performance among market sectors during the two calendar periods. 

During the prosperous months (November through April), on average, cyclical sectors easily outpace defensive sectors. This includes consumer discretionary, industrials, materials, and technology sectors. 

Conversely, during the May-October period, defensive sectors outpaced the market, including utilities, consumer staples, and health care. 

Of course, it’s prudent to assess the risk involved in sector concentration, and you should always evaluate every investment opportunity based on its own merit and its possibility for future returns. 

You could also consider a “sell in May and potentially stay” strategy, wherein you get rid of investments in May that don’t have long-term return potential. That way, you’ll have cash on hand to adjust your portfolio as needed. 

And if you are looking for stocks to rotate, you’ve come to the right place…

Safe Picks for Your Portfolio 

According to Nasdaq Ventures, there are a few stocks to consider adding to your portfolio to protect yourself from the underperforming month of August and find high-yield returns. 

Energy Transfer LP (ET) describes itself as “one of America’s largest and most diversified midstream energy companies.” It also owns and operates diversified portfolios of energy assets, mostly in the United States.

Although shares slipped on Monday, it has a dividend yield of 6.2% and a five-year average dividend yield of 9.3%. The company also has an expected earnings growth rate of 987.5% for 2021. 

Another strong pick is New York Community Bancorp, Inc. (NYCB), which provides traditional and non-traditional products and services along with access to both online and mobile banking. It is one of the largest banks in the U.S., with 225 locations in New York, New Jersey, Ohio, Florida, and Arizona. 

Both its dividend yield and its five-year average dividend are 5.8%, and the expected earnings growth rate for the year is 43.7%. 

Redwood Trust, Inc. (RWT) is a self-advised and self-managed real estate investment trust and another top pick to add to your portfolio. This special finance company is focused on making credit-sensitive investments in residential loans and other mortgage-related assets, as well as residential mortgage banking activities.

On their website, they list their goal as “provid[ing] attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale.” 

Their stock has a dividend yield of 6.1%, and their five-year average dividend yield is 8.1%. The expected earnings growth rate for this year is 3,125%! 

Recently, the company reported second-quarter earnings that were very impressive, with a net income of $90 million, revenue of $139 million, and adjusted revenue of $31 million. This topped analyst forecasts and put the stock in a great position for returns. 

So although we may be entering the worst month of the year, financially speaking, hopefully, you are now armed with the knowledge to outsmart the summer slump.

To a Richer Life,

The Rich Life Roadmap Team 

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