Memorial Day marked the unofficial start of summer in the U.S. Interestingly, there are many summer-related stock market myths about performance that don’t actually reflect the realities. Contrary to the “Summer doldrums” narrative, historical data suggests that the period from Memorial Day to Labor Day often offers opportunities for investors. In addition, this particular summer of 2024 is especially full of unique considerations for investors.
Summer Market Performance
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab (NYSE:SCHW), challenges the traditional “sell in May and go away” mentality. She points out that historically, the market has been up about two-thirds of the time during the summer months.
To make things even better, this is a Presidential Election year in the U.S., which statistically improves the outlook. According to CFRA, a financial intelligence firm, the S&P 500 (SPX) has averaged a 1.6% gain during summer stretches dating back to 1945. Interestingly, this average jumps to a more impressive 3.7% gain during presidential election years, with positive returns occurring 80% of the time.
The picture becomes even better when we combine the historical data with the strong corporate fundamentals we are currently seeing. Indeeed, corporations have demonstrated resilience in the face of higher interest rates, with strong balance sheets and growing earnings. This suggests a strong foundation for the market during this summer’s months. Additionally, contained oil prices and OPEC+’s decision to maintain production output levels could contribute to a stable market environment.
Key Downside Risk
While the historical trends and economic data paint a promising picture, there are always risk factors to consider. This time, the primary concern is inflation and its potential impact on interest rates. A hotter-than-expected manufacturing report spooked investors recently, raising fears that the Federal Reserve may be forced to keep rates high or even raise them further. The Fed’s next announcement regarding interest rates is scheduled for June 12th.
Navigating Market Choppiness: Sectors to Watch
Market strategist Sam Stovall of CFRA predicts a summer marked by volatility, with a potential pullback (larger than April’s shallow correction) likely to happen in the fall. Stovall advises investors to be prepared but emphasizes it won’t be a “new bear market or a deep correction.” He also highlights defensive sectors like healthcare as historically strong summer performers.
Within the S&P sub-industries, data shows biotech leading the pack with an average summer gain of 7% since 1990. Semiconductors, fertilizers, agricultural chemicals, healthcare equipment, and healthcare facilities also tend to outperform. Conversely, airlines, casinos, and luxury goods have historically lagged behind during the summer months.
Key Takeaway – There Is Still Room for Growth
While the summer season may bring some market volatility, history suggests there’s still room for growth between Memorial Day and Labor Day. Still, investors who would like to offset some potential market fluctuations could consider defensive sectors and dividend-paying companies like utilities.
