What to Expect from Key Stock Indices After Labor Day

What kind of return should investors expect from the key stock indices the day after the last weekend of summer?

Here’s some insight.

In the 23-year period from 1990 to 2013, the highest return achieved by the Dow Jones Industrial Average on Tuesday after the Labor Day weekend was on September 6, 2005, when the index rose 1.35%. The lowest return it has provided to investors was a loss of 4.05% on September 3, 2002. (Source: Stockcharts.com, “Past Data,” last accessed August 29, 2013.)

If we take out the top and the bottom returns for the day, then the average return for the Tuesday after Labor Day weekend on the Dow Jones Industrial average is actually flat.

In the last 23 years, the Dow Jones Industrial Average has provided positive returns on 13 Tuesdays after Labor Day weekend and negative returns on 10 of them. Hence, there is only a probability of 56% that investors will see positive returns by investing in the Dow Jones Industrial Average this coming Tuesday—not worth the risk at all.

Dear Reader; the returns provided on the Tuesday after Labor Day weekend shouldn’t be your focus. But this weekend is very important to key stock indices in another way.

The period between Labor Day weekend and the Thanksgiving holiday is considered to be the busiest for the stock market…and one of increased volatility for key stock indices. Trading volume pours in as those who were away for vacation usually come back and traders get serious. Most of the major moves in key stock indices we have seen over the past 23 years have been during this time.

Over the summer, many risks have built up for key stock indices.

Eighty-five companies in the S&P 500 have already provided negative guidance on their corporate earnings for the third quarter—a startling 82% of all the companies that have issued earnings outlooks so far. (Source: FactSet, August 23, 2013.)

And we continue to hear noise about the Fed tapering quantitative easing in September. On those fears, we have already started to see key stock indices in the emerging market slide lower. It’s not a hidden fact anymore; quantitative easing played a very important role in getting key stock indices to the high level they are at today. Pulling back on that money printing is very risky as far as the stock market is concerned.

Going into the Labor Day weekend, I realize more and more: key stock indices have risen on the Fed’s unprecedented monetary stimulus (five years of artificially low interest rates and trillions of dollars in new money printed). But now we have dismal economic growth and the anemic corporate earnings that accompany it. Sooner rather than later, this stock market will experience a regression to the mean. Be careful about this market.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. A dire prediction that came true.

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