Next 2 months to test Wall Street’s mettle

The market’s impressive 19% gain from its February bottom is about to get its ultimate test: The calendar.

Stocks are entering the part of the year that infamously proves to be one of the most difficult. August and September have been the two worst months of the year in terms of stock market performance since World War II, says Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence.

If that’s not disappointing enough, a third of the monthly declines of 5% or more occurred in August and September.

Reasons to worry about these months go even further. The second- and third-worst single-month drops also happened during these two months. Stocks suffered a 14.6% decline in August 1998, which was the second- worst showing for a month after October, Stovall says. There are many possible explanations for why these months are so poor, ranging from investors going on vacations to scrutiny of second-half earnings forecasts, a falloff in capital inflows and portfolio positioning by mutual funds at the end of their fiscal year.

Investors should know stocks struggle in August and September, and be mentally prepared for volatility, but that doesn’t mean they should bail.

Defensive sectors such as consumer staples, health care and utilities all posted positive stock gains during the third quarter. Stocks, too, eventually bounced back with the S&P 500 rising an average 5% in the fourth quarter.