One way to reduce the negative effects of potential equity headwinds is to incorporate seasonal analysis into your portfolio management process. This allows you to identify sectors and industries that may outperform the broad market during this historically volatile month.
We are encouraged by three sectors’ seasonal tendency to outperform the S&P 500 Index during August over the last 20 years—a month when the index has on average been lower by 1.2% for equity investors, generating positive returns 50% of the time. As we review the data, note that nonseasonal factors still influence performance and should not be ignored.
The table below highlights sectors’ average over- and under-performance versus the S&P 500 during August since 1997, as well as the top-performing industry groups over the same period:
Looking at the table above, the utilities, information technology, and consumer staples sectors on average tended to exhibit relative strength versus the index in August over the past 20 years. But, if you’re looking for a more targeted strategy, the table also shows the industries underlying the relative strength at the sector level (i.e. “What to Watch in August”).
Drilling down, the information technology and consumer staples sectors experienced broader participation in August among their underlying industries versus utilities, comprising 5 of the top 10 industry categories (50%) listed within the chart. This was due in part to their market cap and overall weighting within the S&P 500. On the other hand, though a laggard at the sector level, consumer discretionary has shown pockets of seasonal strength in select industries.
Although the index has tended to post negative returns in August, seasonal analysis can help to identify which sectors and industries may fare relatively well, particularly if volatility increases due to potential seasonal headwinds that historically have been more prone to occur toward the end of the summer. Stay tuned to the LPL Research blog for continued analysis of S&P 500 seasonal patterns.