Summertime blues haven't been so blue the last 15 years.
A common adage is that the summertime period is usually a slow time in equity markets for whatever reason people come up with – vacations, distance from the end/beginning of the year, etc. While there is some truth to the old adage, the summer has been much brighter for equity markets since 2010 versus since 1990. For today, we’ll define summer as the period from 5/31 to 8/31. The average return over the summer for the S&P 500 Index (SPX) since 1990 is a measly 0.87% while the rest of the year (8/31 – 12/31) averaged 4.22%. Even on a median basis, the summer months have struggled relative to the rest of the year with the SPX returning 2.48% versus 5.24%, respectively since 1990. While it is true that the summertime period is three months while the rest of the year is four months, this is still a notable spread in performance. However, this changes when looking at market returns since 2010. Market returns have been much better in the summer and beat the rest of the year on a median basis. Since 2010, the summer months have had a median return of 4.15% versus a rest of the year return of 4.13%.
Much of the difference between the two lookback periods has to with just a few instances. For example, before 2010, the SPX had three summertime periods where it posted a loss of more than 10% while that hasn’t happened once since 2010 (1990, 1998, and 2002). Positive returns have been more consistent since 2010 as well with the SPX positive 73% of the time over the summer, while going back to 1990 dropped that positive hit rate down to 63%. While summertime returns have been better since 2010 versus going all the way back to 1990, the slow part of the summer market adage has rung true. Over both periods, since 1990 and since 2010, the average VIX reading in the summer has been less than the average VIX reading for the rest of the year. The spread has gotten closer when looking at the data since 2010 which also highlights the seemingly less difference between the summer months and the rest of the year. Secondly, volatility has been lower on average since 2010 than since 1990 and while many immediately think of 2008 and 2009, 1997 through 2002 was also a period of consistently elevated volatility.
When looking at the last few summers, they have been especially strong. Outside of 2022 when the SPX returned -4.29% in the summer versus -2.92% the rest of the year, summertime returns beat the rest of the year returns every year since 2020 by an average of 2.68%. This is impressive given the summertime period has one less month to work with than the rest of the year. While the old adage about summer and the market has remained true from a volatility standpoint, the idea that it’s a poor performance period has not rung true over the last 15 years. There could be plenty of reasons why this has been the case, but regardless, it highlights the importance of following a relative strength approach despite what some long-term seasonality studies may suggest. As we've seen over the last five years, missing out on the summer would've led to a big hit to performance over that entire period. While seasonal trends are an observable phenomenon, it's important not to overemphasize it when managing client's portfolios.
