Why August is called the “Ghost Month”
What is the “Ghost Month”?
The Ghost Month is the seventh month of the lunar calendar. The dates vary each year, but this year, the ghost month will start on August 16 and end on September 14. The practice of observing the ghost month originated with the Chinese. According to Chinese folklore, the Ghost Month is a time when spirits of their dead ancestors and relatives visit the world of the living. As such, they refrain from doing things such as traveling, starting a business, or moving to a new home as these may upset the spirits. Investments in new ventures and stocks are also put-off for later dates.
When is it?
Historically, August has been one of the worst performing months for the PCOMP Index with an average return of -2.48% with 20 out of the 30 years (66% hit rate) being negative since 1992. Moreover, out of all the months in the lunar calendar, the ghost month has the highest chance of declining and the lowest average return.
On Wall Street, August is the month associated with the worst performances for the Dow Jones Industrial Average, S&P 500 index, as well as the small cap Russell 2000, and large-cap Russell 1000 indexes over the past 3 decades, according to the folks at Stock Trader’s Almanac. The research outfit said that from 1988 to 2020 average declines for the benchmarks ranged from 0.4% for the Russell 2000 to 0.8% by Dow. For the Nasdaq Composite, meanwhile, August ranks as second-worst, with an average gain of 0.2% over the same period, with September being the worst month for the technology-heavy index.
As shown in the chart below by LPL Research, August and September have been historically two of the weakest months of the year for the S&P 500. However, since 1992, the average returns for the S&P 500 for the final quarter of the year has been +4.49% with 24 out of the 30 years (80% hit rate) being positive.
How does this affect investors?
Investors are probably wondering if they should sell in anticipation of a possible short-term correction. If the market indeed falls 2% to 3% from current levels, active managers and traders may take advantage of a trading window to generate outperformance. However, we note that it is very hard to sell near the top and buy near the bottom. Moreover, it is extremely difficult to accurately predict the magnitude and duration of such a correction. Even if seasonality in the stock market is backed-up by statistics, it is possible that the market may not even experience a near-term correction. Case in point, the PCOMP Index went up by 9.33% last August 2021. This was the best performing month for the stock market since September 2010 when the market went up by 14.97%.
What does this mean for investors?
Investors should take advantage of the seasonally weak performance of the stock market during the ghost month by using this period as buying opportunities. Rather than being afraid of the ghost month, investors should actually take advantage of the market weakness as a buying opportunity in preparation for a Christmas rally. December and January have delivered the highest average returns of 3.46% and 2.48%, respectively, since 1992 with a batting average of 70% and 63%, respectively. At the end of the day, seasonality in the stock market should not have a major impact on the investment decisions of long-term investors. Instead, long-term investors may use these dips to gradually increase their equity portfolio.
For those who are underinvested in stocks and have a long time horizon, the ghost month might be a good time to start building or adding to equity positions.