Dow Jones Industrial Average and S&P 500: History Suggests Stocks Are Headed Lower

bearbull21Mike Burnick: Stocks ended the holiday-shortened 4th of July week with a bang, which carried over to this week. But the real fireworks are still to come as investors digest second-quarter sales and profit reports in the weeks ahead. Equity markets have been granted a reprieve since the Labor Day holiday as the threat of a military conflict in Syria eases and economic reports suggest countries from the U.S. to the U.K. to China are improving.

Still, stocks are heading into what’s been historically a weak time of year. And 2013 may be no different in that regard, except it might be a lot worse.

Stocks tend to swoon in September and continue to decline in October, as seen in the chart below.

Click for larger version

Based on historical market data that stretch to 1928, the benchmark S&P 500 Index declines in September 60 percent of the time, posting an average loss of 1.1 percent. But that’s only the beginning.

Stock markets and the economy also tend to track a four-year presidential cycle. This is the first year of the cycle, and September begins the weakest period of this four-year pattern. Equities tend to perform even worse from September through year-end than is usual in an average year, and there’s more bad news.

Even though stocks have risen this month, a correction started in August, with the S&P 500 falling more than 3 percent last month. Historically, when August is down in the first year of this cycle, September is down even more often — 64 percent of the time, with a decline averaging 2.6 percent. Worse, stocks continue to fall in October, dropping another 1.3 percent on average.

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