Market Health

The Truth Behind the Stock Market’s Summer Lull

There’s an old stock market adage, “Sell in May and go away. Don’t come back till Labor Day.”

It rhymes, which is obviously the most important aspect of any trading strategy.

But the premise isn’t as flimsy as it might appear.

The theory is that, during May, markets lag. Typically, that’s due to lackluster first quarter earnings. Investors are coming off a fourth quarter high where revenue was at its peak. And everything appears sad and unimpressive in comparison.

So May is full of sell-offs.

Then, starting in June, the markets get tangled in the hammock of the “summer lull.”

This is the time of year when retail and professional investors alike head off for vacation, put their feet up and ignore their life savings, bobbing untethered and directionless in their accounts.

Or so the theory goes…

Finally, after Labor Day, investors head back to reality.

Over the years, I’ve spilled plenty of digital ink explaining how silly the “Sell in May” strategy is.

But there is one piece of the argument that holds true: the summer lull.

For the weighty, slow-moving blue chips on the Dow Jones Industrial Average, summer is by far the least pleasant stretch of the year…

Chart - Monthly Performance of the Dow

February through April is awesome. So is September to New Year’s. January – like May – is hit or miss.

July is historically a very strong month. But it’s bookended by June and August.

May appears worse than June in this table. But that’s only because of the horrid stretch from 2010 to 2012.

Believe me, June is consistently bad. The Dow has ended the month down 13 times since 2000. That’s a shockingly high failure rate of 68.4%.

And the next consistently bad months for stocks are January and August – both are prone to big downward moves.

Does that mean you should sell in May and scoot off to the Caribbean for a few months?

If you can afford to do so, sure.

Otherwise, expect the volatility, like I do. And look to take advantage of the pullbacks. Plus, as I always suggest, buy shares of companies that shine brightest during the summertime.

Good investing,

Matthew