The idea of a "summer rally" for stock price has been around for a long time. Perhaps too long as it turns out. Best as we can tell, the origin of the idea that stocks rally during the summer comes from an unusual period way back in the Great Depression. In the Summer of 1932, the Dow Jones Industrial Average almost tripled in price over the summer season. Of course, that tripling came after the drubbing of a lifetime which saw the index down about 80 percent during the previous three years.
I'll leverage some research from Mark Hulbert, editor of the Hulbert Financial Digest and a writer for MarketWatch, an online investment information service, to share some perspective on the fable of the summer rally. As it turns out, a better label for this concept would be "a rally for all seasons." Let's take a look.
Mr. Hulbert's research revealed that, in fact, over the last 115 years of the existence of the Dow Jones Industrial Average, there was an average gain of 5.3 percent from the end of May to the highest point the index achieved over the next three months. Initially this sounds impressive, and some might even point to the fact it represents an annualized rate of return over 20 percent for that short period of time.
However, the market also experiences rallies (and of course, declines) during other periods of the year as well. Mr. Hulbert went on to check the average gain from the end of the other 11 months of the year to the highest close for the Dow during the next three months. The answer – 5.2 percent, a gain almost indistinguishable from the fabled summer rally.
Perhaps most importantly when examining statistical evidence, is to look for anomalies that can skew the results. The aforementioned huge gain for the Dow Industrial Average back in 1932 is an example of this. In fact, from 1940 through 2010, the average summer rally was only 4 percent from the end of May to the high point of the summer. Seven of the other 11 months of the year sported higher returns to the high points of rallies in the three-month measuring period.
These results shouldn't be too surprising when you consider another Wall Street saying that I've written about before.
"Sell in May and go away" references the below average returns offered to investors during the summer season when the market's activity is viewed as an average of many years of data. There will likely be a summer rally, but obviously there are summer declines as well, just like there are rallies and declines in every season.
Investment decisions based purely on short-term historical trends repeating themselves can be hazardous to your financial health. Stick with strategies that have the evidence of working well over time to give yourself the best chance of success.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.