The summer months are often the worst for stocks

August is often cruel to stock investors. And this month is shaping up to be one of the worst.

The S&P 500 index is down 10 percent. Even with Tuesday's gain of 3.5 percent, it's heading for its biggest August drop since 1998.

Sam Stovall, chief investment strategist for S&P's equity research team, says the summer months are often the toughest for stocks. Since 1990, the three months starting in July have been the worst quarter for the S&P 500 on average.

The index's drop this month is its second-worst after August 1998. The S&P 500 fell 14.6 percent during a financial crisis in Asia. That was also one of its 10 worst months.

"Historically, the market just doesn't do very well in the third quarter," Stovall says. "It's one of these dance routines the market tends to go through."

He thinks it's no coincidence that the S&P 500 reached its peak for the year on April 29, right in tune with a well-known market saying, "sell in May and go away." The S&P 500 closed that day at 1,363.61. It closed Tuesday at 1,162.35, down 15 percent from its high.

Stocks began falling right at the start of this month. Investors were unhappy with the government's report on July 29 that economic growth in the first half of the year was weaker than it previously estimated. Aug. 1 brought another worrisome report: Manufacturing barely grew in July. Investors began fearing another recession as more disappointing economic reports arrived. And those fears were worsened by Europe's debt crisis.

Last August was also miserable, although the S&P 500 fell only 4.7 percent. Investors were also worried about another recession. Two events ended the market's slump. On Aug. 27, Federal Reserve Chairman Ben Bernanke hinted that the Fed would be taking steps to help the economy. Those steps turned out to be the central bank's purchase of $600 billion in Treasury securities. And on Sept. 1, the Institute for Supply Management surprised the market by reporting that manufacturing had risen in August.

August isn't always so brutal. More often than not, stocks climb. Since 1950, the index has moved higher 34 times and dropped 27 times, according to the Stock Trader's Almanac. It has gained 0.1 percent on average. That makes it the fourth-worst month out of the year. September, June and February are worse.

Some Augusts have been deceptively good. In 2008, the S&P 500 rose 1 percent. The next month, Lehman Brothers collapsed and the financial crisis began.

Jeff Hirsch, the almanac's editor-in-chief, notes that August is a big month for vacations. That leads to less trading and big price swings.

He says stocks used to do well in August when farming was a bigger contributor to the economy than it is now. Back then, it was harvest time, and farmers were making money.

"That made August a strong month in the stock market," Hirsch says. Now, "there are just fewer buyers from Memorial Day to Labor Day.