Is the "August Curse" Coming Again for US Stocks? Warren Buffett and other investment giants are singing short of the S&P index | Buffett

Since the beginning of this year, the US stock market has shown a sharp trend, with the S&P 500 index up 18%, recording its best performance for the same period since 1927. The Nasdaq index has risen by 34%, and the Dow Jones index has also risen by 6%. However, based on the historical trend of the past 35 years, the "August curse" has always been a nightmare that US stock investors cannot shake off.

Analysts say that US stocks typically perform poorly in August, especially before the election year. Wall Street institutions, including JPMorgan Chase and Wells Fargo, as well as investment giants such as Warren Buffett and John Hirschman, have also started to short the US stock market.

What is the future trend of US stocks?

August Curse

According to the data compiled by the US Stock Traders Yearbook, August has been the second worst performing month for the S&P 500 and Nasdaq indices over the past 35 years, and also the worst performing month for the Dow Jones Industrial Average. Looking back at history, in August 1990, the Kuwait War broke out; In August 1997, the Asian "financial crisis" spread; In August 1998, Russia experienced a debt crisis and the Long Term Capital Management Company in the United States was on the brink of bankruptcy; In August 2011, the US debt rating was downgraded.

History also shows that if the US stock market performed well in the first half of that year, the probability of the "August curse" may be even higher. Meanwhile, in August before the presidential election, the US stock market was particularly prone to weakness: in 2011, 2015, and 2019, the S&P 500 index, Nasdaq, and Dow all recorded a full decline in August.

According to data compiled by LPL Financial, if the trading history is traced back to even earlier 1950, the average trend of the S&P 500 index in August was basically unchanged, with a median increase of only 0.6%. LPL Financial's Chief Technical Strategist, Ternquist, stated that due to the good performance of the US stock market so far in 2023 and the relatively weak seasonal trend in the future, "we suspect that this may be a reasonable time for the US stock market's rebound to pause or retrace.". The so-called weak seasonal trend refers to the fact that when measured by seasonal factors, the trend of US stocks usually only gets worse in September. In history, September was the worst month for the overall performance of the US stock market.

Based on the current situation, the US stock market has indeed encountered bearish factors again after entering August. Last week, international rating agencies downgraded the credit rating of the US government, which led to the yield of 10-year US treasury bond bonds jumping to 4.12%, a new high in 2023, while US stocks fell for several consecutive trading days. The Nasdaq and S&P 500 have fallen by approximately 2% since August, while the Dow has fallen by approximately 1%.

"When interest rates rise, it puts pressure on growth stocks, technology stocks, and communication stocks. Therefore, no matter what Fitch does, the continued interest rate hikes caused by the Federal Reserve will bring a perfect storm to the US stock market," said Parris, founder of Allstacharts.com

The initial increase in the US stock market was mainly concentrated in the technology sector, communication services sector, and non essential consumer goods sector. Subsequently, after the Dow hit a 52 week high in June and July, the breadth of its rise expanded. During the same period, the number of tracks also reached a peak. Paris questioned, "If these technology and large cap stocks face pressure, the US stock index will remain sluggish for the foreseeable future. Other sectors, such as energy, materials, and industry, have much lower weight in the US stock index. Can they withstand selling pressure from growth stocks?"

Wall Street tycoons join the singing short camp

More and more Wall Street investment banks have recently joined the ranks of short selling US stocks.

Klanovich, US stock strategist of JPMorgan Chase, said that the hype about AI is creating a foam in US stocks, and this foam may burst soon. In a recent report, the top quantitative strategist stated that stocks in the S&P 500 index are highly concentrated, with the top seven companies accounting for 25% of the benchmark index. This is a strong sign that the foam is vulnerable to the threat of adverse factors in the current macro environment. "We still believe that the delayed impact of the global interest rate shock, the steady erosion of consumer savings, the pent up demand after the COVID-19 epidemic, and the deeply disturbing global geopolitical background will lead to the decline of US stocks and the recurrence of market volatility," he said.

Rennes, Chief Global Market Strategist at Wells Fargo, warns that the risk of inflation rebounding is too high, and therefore, the risk and return of entering the US stock market are uneven. In his view, although prices in the United States have dropped significantly compared to last year, inflation is likely to rise again due to persistent pressures in the economy, such as a strong labor market. Ren said, "If the downward trend of inflation tends to flatten and reverses with the rise of interest rates, we believe that the industry sectors driving this US stock rebound should easily experience a significant pullback and affect the overall stock index." However, he expects the S&P 500 index to reach 4600-4800 points by the end of this year, slightly higher than the current level.

BlackRock, the world's largest asset management company, is also concerned about the impact of inflation, but the reasons for concern are slightly different. BlackRock's recent report predicts a "roller coaster inflation" in the future, which is bad news for stocks: high inflation has increased the company's costs and affected profits. But the decline in inflation has lowered the pricing of the company's products, which is also negative for profits. "If inflation remains high, we expect corporate profit margins to be squeezed, and if inflation decreases, they will be even more squeezed," BlackRock said. "Therefore, news like a decrease in inflation may not necessarily be good news for the market."

Rosenberg, the head of Rosenberg Research and former Chief North American Economist at Bank of America Merrill Lynch, saw risks in the recent 13 day consecutive rise of the Dow Jones Industrial Average. He said this was the longest consecutive rise for the Dow Jones since 1987. In 1987, the Dow rose 28% in 13 days and then plummeted 19% later that year. He sees the current upward trend of the US stock market as another brief rebound based on a fear of missing out mentality.

Rosenberg stated in a client report, "Back then, as now, market complacency was everywhere and bears were ridiculed, but let's see how the US stock market ended up flat that year." He warned that although the market cheered for a decrease in inflation, it meant a decline in corporate profits, which could also put pressure on the stock market. Inflation fell sharply in the early 1980s and the early 2000s when the Internet foam burst and during the 2008 financial crisis. These times, the S&P 500 index fell by 8%, 26% and 30% respectively.

Furthermore, despite the astonishing resilience of the US economy this year, Rosenberg suggests that investors should not rule out the possibility of economic contraction. "The economic recession is likely to have started, but it hasn't been noticed yet," he said. "Just like the quarters before the recession in 1990, 2001, and 2007, the market's tone was always a 'soft landing'."

A group of investment experts have also started warning modes. Buffett, the stock god, recently stated that his favorite market indicator is flashing a red light, indicating that the US stock market is priced too high and there is a risk of a sharp decline.

The market indicator known as the "Buffett Index" has recently jumped to 171%. Buffett once stated in an article in Fortune magazine in 2001 that when Buffett's index is 100%, it indicates that the valuation of US stocks is reasonable. Buying at a level of 70% or 80% may be good, but buying US stocks around 200% is equivalent to playing with fire. Buffett once praised his eponymous indicator as "possibly the best single indicator to measure the valuation of US stocks at any given moment.".

John Hesman, legendary investor and president of Hesman Investment Trust, also issued a warning again recently, saying that the valuation of US stocks is too high, which will break what he called "the speculative foam of extreme pursuit of returns", and predicted that this foam will eventually "end in tears". The S&P 500 index needs to fall 64%, so that the market can return to a more balanced state.

Hasman accurately predicted the stock market crash in 2000 and 2008. In 2000, he predicted that technology stocks would plummet by 83%, and between 2000 and 2002, the Nasdaq 100 index inexplicably fell by 83%. Subsequently, he warned in 2007 that the S&P 500 index could fall by 40%. During the stock market crash from 2007 to 2009, the index ultimately fell by 55%. "I know it sounds ridiculous. But I'm used to making seemingly absurd risk estimates when the foam reaches its peak," he said of this prediction.

Booth, a former Dallas Fed adviser and chief executive officer and chief strategist of QI Research, said that investors were so fascinated by the soaring US stocks that they ignored multiple danger signals in the economy, and compared the current stage with the Internet foam in 2000 and the real estate foam in 2007.

"Because the US stock market is still at a high level, it is easy for people to overlook the actual situation of the US economy." She said, "We also saw a similar level of complacency in 2000 and 2007. But the outcome of those two times was not good. I think we are now in a 'calm before the storm' period." She mentioned the actual situation of the US economy, including several sectors experiencing 'severe weakness', the fastest rate of companies filing for bankruptcy since 2009, and with the withdrawal of lending institutions, the value of commercial real estate has significantly decreased, and developers are working hard to obtain funding. ". She believes that more banks will face Silicon Valley style bankruptcies in the coming months.