Although summer doesn’t officially begin for about another month, many Americans recognize Memorial Day as the unofficial start of the season, which is right around the corner
Although summer doesn’t officially begin for about another month, many Americans recognize Memorial Day as the unofficial start of the season, which is right around the corner. Many of us are looking forward to the warm weather, beach vacations, and the other usual summer activities. However, in the investment world, the summer months are associated with lackluster returns, also known as the "Summertime Blues." This year, we enter the summer months after what has been a strong start to 2023 despite poor breadth as the S&P 500 (SPX) is currently up over 9% year-to-date.
The table below shows the returns of both the Dow Jones Industrial Average and the S&P 500 during the summer months (May 31st to August 31st) back to 1981. The S&P 500 and the Dow Jones Industrial Average have each finished in negative territory in 15 of the past 41 summers (or about 37% of the time). Of those 15 down summers, there were 13 summers in which SPX and DJIA were both down at the same time. While less than half of the summers have been negative for these benchmarks, the bad summers were indeed bad, with some down double digits over the three-month period. For instance, in the summer of 1990, SPX fell -10.69%. In 1998, it saw a drop of -12.24%, but the worst summer came in 2002 during the tech crash when the index declined -14.16%. During the summer of 2008, which began a famously longer slide as SPX fell -8.39%. The market has bucked the trend over the last several years, however, 2022 was the weakest summer since 2015.
To determine if there is one month that tends to have an outsized effect on summer returns, we compiled a monthly summary of S&P 500 returns going back to 1958. What we found is that the summer months tend to have a lower median return than most of the other months of the year. It is the month of September that has historically provided the lowest median return at -0.35%, but it is followed closely by June which has a median return of just 0.08%. Notice too that the spread, i.e., the max return in a given month versus the minimum return in a given month, is relatively low for the summer months (namely June and July). A closer look at the month of June reveals a max return of 6.89% in the last 60 years, which it posted in 2019, and which followed a May return of -6.58%. Every other month, except February, had a maximum return of more than 8%. Clearly, June has historically been one of the weaker months for SPX returns. However, we can't blame the Summertime Blues on June alone. August has experienced the second-largest drawdown (after October) at -14.56%, which compares unfavorably to the other months' minimums which seem to hover around -10%.
To take this concept one step further, we looked at four hypothetical portfolios specific to each of the four seasons. Defined as follows:
Winter Portfolio Dates: 11/30 - 2/28
Spring Portfolio Dates: 2/28 - 5/31
Summer Portfolio Dates: 5/31 - 8/31
Fall Portfolio Dates: 8/31 – 11/30
The end result? The summer portfolio greatly underperformed the other three seasons - fall, winter, and spring. If you were to invest only during the spring months (March through May), the initial investment would have had a cumulative return of over 600% from 1958 through April of 2023 (since May has not yet completed), with an annualized return of 9.39%, making it the best performing seasonal portfolio. The winter portfolio deserves an honorable mention because it produced an over 500% return over the study period. The point of the graph below is to show that the summer months paled in comparison to the others, gaining just 87% since 1958 - that results in an annualized rate of return of only 2.89%.
There have been exceptions along the way (like the summers of 2020 and 2021), but the Summertime Blues have been a common occurrence for market participants over the last 60 years and the summer months have occasionally produced some significant down markets, like 2022. However, this does not mean that we should all simply go to cash at the end of every spring - faced between the summer market return or earning nothing by going to cash, on average, investors have ultimately been better off by taking the market return.
