Looking for Summertime Portfolio Sizzle? Market Sectors to Watch

Stock market trends and seasonal patterns happen throughout the year, but one market trend is particularly pertinent right now: the good old summertime doldrums. Summer markets typically bring reduced trading volume and a general sense of ho-hum among investors and traders. It’s summer, after all. Still, for investors, it’s worth keeping an eye out for possible pitfalls and opportunities in the next couple of months.

“Summer is often a relatively dull period for the markets because professional investors and traders, like many other people, tend to dial things back a bit,” said Ryan Campbell, senior content producer at TD Ameritrade. “Kids are out of school. Many folks take off for vacations or otherwise relax and get away from the workaday world.”

However, there are other factors that influence or characterize summer markets. So, there’s no need to cancel that trip to the beach or the mountains, investors—just keep a few questions and points in mind.

How Much Lower Is Trading Activity During the Summer?

According to the Stock Trader’s Almanac, which analyzed seasonal volume patterns for the New York Stock Exchange (NYSE) and Nasdaq stocks back to 1965, a “typical summer lull” usually starts at the end of June and continues through early September, with daily trading volume often falling 10% or more below the annual daily average.

Among all months, July and August rank number 10 and 12, respectively, in terms of average daily U.S. trading volume, according to Sam Stovall, chief investment strategist at CFRA. October ranks number one; December is number 11.

Soon after Memorial Day weekend, considered the unofficial start of the U.S. summer, “trading activity typically begins to slowly decline (barring any external event triggers) toward a later-summer low,” added Jeff Hirsch, CEO and editor of the Stock Trader’s Almanac.

How Does Behavior of Professional Investors Come into Play?

Earlier in the year, some money managers may have loaded up on small-cap stocks, which tend to be faster-growing and more speculative than their larger counterparts, according to Campbell. Many are hoping they’ll outperform a benchmark like the S&P 500, in other words—during the first half of the year.

Come late May or so, a money manager whose portfolio has outperformed the broader market might opt to step back, play it safe for the next three months, and not take on any riskier investments. That sort of cover-your-behind mentality can contribute to the lower trading volume.

Money managers may feel they can “coast through the summer months by just mimicking their benchmark,” Campbell said of this mentality. “When summer ends, people get back to work and refocus on their portfolios.”

Hirsch noted that amid “anemic volume and uninspired trading on Wall Street, individual traders who might look to sell a stock are often generally met with disinterest from the Street. It can become difficult to sell a stock at a good price.”

Lower trading volume may suggest a lack of conviction in any market rallies. “That’s why many summer rallies tend to be short-lived and are quickly followed by a pullback or correction,” Hirsch added.

What Market Sectors Have Historically Performed Well During the Summer?

The consumer staples and utilities sectors, as well as shares of precious metals companies, have historically outperformed other sectors, or the broader market, during the summer months, according to the Stock Trader’s Almanac. Health care stocks—particularly in biotechnology, medical products, and pharmaceuticals—have also outperformed. Keep in mind that is no guarantee this summer will look similar.

So-called defensive stocks have also demonstrated resilience during the broader May-through-October period, a historically weak stretch for the overall U.S. stock market, according to the Stock Trader’s Almanac.

For example, S&P 500 consumer staples sector companies rose in 79% of May-through-October periods from 1990 to 2018 and posted an average gain of about 4.4% during that six-month time horizon, according to Stock Trader’s Almanac. Utilities sector shares rose in nearly 76% of those years while posting an average gain of 1.9%.

By comparison, the Stock Trader’s Almanac reports the broader S&P 500 posted an average gain of 1.8% and rose 69% of the May–October periods from 1990 to 2018.

Should You Really “Sell in May and Go Away?”

This old stock market axiom ties in with the summer doldrums and the historically weak May-through-October stock market trends.

Since 1946, the S&P 500 posted an average gain of just 1.4% from May through October, according to Stovall, citing CFRA research. By comparison, the S&P 500 gained an average of 6.6% from November through April since 1946.

Additionally, the S&P 500 recorded a positive six-month return 77% of the time from November through April but only 64% of the time from May through October, according to CFRA.

Stovall emphasized that the S&P 500’s historically soft May–October stock performance doesn’t necessarily mean investors should “retreat” from the market before cookout season. The U.S. benchmark has still generated better returns than the typical money market fund. He points out that, if investors had taken a six-month vacation from the S&P 500 starting in May, they would have missed summertime surges of 14.1% in 1997, 14.6% in 2003, and 18.7% in 2009.

Stovall concluded that it might be better to identify a more attractive approach than retreating from stocks altogether during this seasonally slow period.