July Is the Best Month for Stocks — Especially Dow and S&P

The S&P 500 finished the primary half of the 12 months with a powerful 15% gain, and forecasts for the rest of 2024 remain bullish. Historic trends may give investors reason to be hopeful the rally continues this month particularly.

July is historically one among the best-performing months of the 12 months for the stock market. In response to Dow Jones Market Data, since 1928, the S&P 500 has posted a median gain of 1.7% this month, ending in positive territory 60% of the time.

July’s track record for the Dow Jones Industrial Average is much more impressive, having finished with a gain 65% of the time going back to 1897.

Nevertheless, given the present market environment, quite a few aspects could pose a challenge to that historical track record this July.

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The market’s concentration in big tech stocks

July is not as impressive in relation to the tech-heavy Nasdaq Composite. Dow Jones Market Data shows that since 1971, the Nasdaq has posted gains of lower than 1% during July, making it the sixth best monthly performer of the 12 months.

Market concentration is one other growing concern for each individual monthly performances and overall performance. In late June, the Wall Street Journal reported that 30% of the S&P 500’s first-half gains were attributed to Nvidia, the semiconductor manufacturer that is seen its stock skyrocket over the past 18 months on the back of the AI-propelled frenzy.

Nvidia, which trades on the Nasdaq and is the third largest company within the S&P 500, is a first-rate example of how that market concentration can skew the perception of monthly results.

Since the S&P 500 is weighted by market capitalization, the most important firms’ performances have an outsized effect on how the index appears to be broadly operating. Factset reported in late April that in the course of the first quarter of 2024, five firms — Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia — saw year-over-year earnings growth of 64.3%, while the remaining 495 firms within the S&P 500 posted year-over-year losses totaling -6%.

With the most important indices not as diversified as some may imagine, if any of the highest firms falter in July, it could have a disproportionate impact on overall market performance. Your portfolio could suffer in consequence, not less than within the short run.

Are stocks overvalued?

With corporate profits and the most important indices all hovering around record highs, there’s speculation about stock overvaluation with quite a few indicators suggesting the market is pushing farther into overbought territory. This might function a prelude to a pullback that might see prices fall as investors sell shares and secure profits.

One measure that is evidencing the market being overbought is the Relative Strength Index. RSI is a momentum indicator that determines whether equities and indices are overvalued or undervalued based on recent price changes. An RSI reading of 70 or more indicates something is overbought (or overvalued), while a reading of 30 or below indicates that it’s oversold (or undervalued).

Typically, RSI readings of 70 or above or 30 or below suggest a looming price reversal. On the time of writing, the S&P 500 — which has established 32 all-time highs up to now this 12 months — is showing an RSI reading of 70.15 on its year-to-date chart and is trending upward.

If that reading stays above 70 for a sustained time frame this month, it may very well be followed by a sell-off that might put July’s often positive performance in danger.

Should investors be concerned?

For buy-and-hold investors, month-to-month noise needs to be ignored. Short-term volatility isn’t indicative of long-term price motion, and analysts are in agreement that the second half of the 12 months will see strong gains for the market.

In response to LSEG data, the S&P 500 is forecast to rise 10.4% in the course of the remainder of 2024, which might lead to a full-year gain of 25.4%. That figure would best last 12 months’s 24.23% gain and would greater than double the index’s average annual return of 10.5% since 1957.

Hindsight could also be 20/20, but it surely is not a reliable gauge of market projections. In other words, July’s previous performances offer no reliable indication of where stocks are heading now. As Warren Buffett once quipped, “If past history was all there was to the sport, the richest people can be librarians.”

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