August, not April, is the cruelest month — for stock investors, that is. Often August has been the best performing month, persuading investors that a hot August is more than a fluke. But there have been long stretches where the market’s return in August has been particularly painful. Consider the Dow Jones Industrial Average
DJIA,
-0.14%
going back to its creation in 1896. Over the next century, August was in first place for average performance, with the Dow producing an average gain of 1.8% for the month — more than four times the average return of 0.4% in all other months.
Yet for the past 35 years, since 1986, August has been the U.S. stock market’s worst month on average — worse even than September, whose reputation as a terrible month for stocks is widely known. The Dow’s average August return since 1986 is minus 0.67%, slightly worse than the minus 0.64% for September — and versus an average gain of 1.05% for the other months of the calendar. The difference between August’s average return and that of other months is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. In other words, it was statistically significant when August did much better than other months — and when it fell behind. How can two opposites both be statistically significant? To understand the answer, we need to realize that statistical significance is a necessary, but not sufficient, condition for concluding that a pattern really ex …