The S&P 500 declined a total of 12.4% from the May 21, 2015 high through the August 25 low, marking the 20th time since 1946 that the S&P 500 fell between 10% and 20%. Of course, we don’t know if this correction will ultimately turn around before crossing the 20% decline threshold, or morph into a new bear market. For the month, the “500” fell more than 6%. Is the worst behind us? Possibly not.
September is the only month in which the S&P 500 fell more frequently than it rose. What’s more, in the 11 times that the S&P 500 fell by more than 5% in August, it declined in 73% of the subsequent Septembers, and fell an average of nearly 4%.
Why might this month be true to history? With so many stocks having endured sharp declines since the May 21 peak, many mutual funds will likely be unloading underperformers that, if included in the end-of-quarter list of holdings, might result in shareholder complaints. Better to “mark ‘em down, and move ‘em out.”
September is also the final month of the third-quarter earnings period. With concerns continuing to swell over the slowdown of China’s economy, Q3 S&P 500 EPS performance may weaken even further from the current estimate of a 4.0% decline from the same quarter last year, according to S&P Capital IQ’s aggregate earnings estimates. Add to these items of concern, recent FOMC member commentary indicating that the Fed will not be deterred from beginning to recalibrate interest rate policy by recent stock market volatility, and U.S. stocks may have further to slip before finding a floor.