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Surging stock market is heading into riskiest months of the year

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Before investors get too excited about the July surge in stocks, here’s something to keep in mind: August and September are historically the two worst months for the S&P 500 Index.
Despite a 12.6% advance from a low of 3,666.77 on June 16, the S&P 500 could be facing an ugly stretch just after it had its best month since November 2020. Portfolio managers are debating whether stocks can maintain their recent gains with the Federal Reserve still on track to raise interest rates and the economy sending worrying recession signals.

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Beyond he historical trends, another factor facing stocks this year is US midterm elections. The stock market tends to struggle early in midterm years due to the potential for policy changes in Washington, but it then rallies at year-end once the results are in.

The third quarter of a midterm election year tends to be the most volatile of any in a four-year presidential cycle. And since 1944, it averages a 0.5% decline, the second biggest after the second quarter’s average 1.9% drop, according to investment research firm CFRA.

Of course, stocks could be poised for a further bounce after the S&P 500’s 9% rally last month. Since 1928, when the index climbs at least 5% in July, more gains typically follow, with August and September averaging a respective return of 2% and 0.7%, according to Bank of America Corp.

Read: Risk Appetites Grow in Sign Market Has Set Bottom: Taking Stock

Still, investors are split as to where the stock market goes from here. Jonathan Krinsky, chief market technician at BTIG, believes that the stock market is experiencing a counter-trend rally and that it’s poised for another leg lower in August and September.

“Don’t get fooled again,” Krinsky told clients in a note. “Meet the new boss, same as the old boss.”

That echoes sentiment from Morgan Stanley and Goldman Sachs Group Inc., which anticipate more pain ahead on the assumption stocks haven’t fully calculated recession risks. On the other side are strategists like those at JPMorgan Chase & Co., who see a brighter outlook based on expectations that a mild economic downturn has already been priced into stocks.

“Wall Street was hyper focused on the potential for a recession, but now the narrative has quickly shifted to hopes that inflation may be peaking,” Ma said. “Investors need more economic data to come in more favorably over the next two months to confirm what investors are pricing in.”