Stock gains in the summer are weaker when the market has been strong

By Mark Hulbert

This year there's even less of a reason to expect a summer rally

U.S. stocks may continue to rally this summer - but that doesn't mean there will be a summer rally.

The distinction is important to make sense of the increasing number of commentators referring to an imminent summer rally on Wall Street. As far as I know, none of them has precisely defined what that means. Since the U.S. stock market inevitably will rally at some point between Memorial Day and Labor Day, even if for only a few days, these commentators would appear to be immune from ever being wrong.

It is possible to prove them wrong if we compare the theoretical maximum rally that occurs during the summer months with the theoretical maximums for every other three-month period of the calendar. Analyzed this way, there is nothing exceptional about the summer.

The results of my analysis are found in the accompanying chart. Focus first on the column for the month of May, which is 7.3%. That's the average percentage gain from the end of May to the stock market's highest close over the subsequent three months (through the end of August, in other words). This average reflects the Dow Jones Industrial Average DJIA since its inception in 1896.

(Note that this gain is hypothetical, since you'd need clairvoyance to know when the market will hit its highest close during the summer. I nevertheless calculated the gain this way because it reflects the maximum potential gain from a summer rally.)

Contrast this 7.3% to comparable statistics for each of the other months of the year. Notice that there is nothing unusual about it. Though the summer rally is slightly higher than the average rally potential of 6.6% for all three-month periods, this difference is not statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

Summertime sadness

These results are already enough to throw cold water on the expectation of a summer rally. But this year there's even less of a reason to expect one.

That's because the potential gain of the summer rally is lower when the stock market's year-to-date return has been greater. The stock market so far this year has been particularly strong, with the Dow hitting 40,000 for the first time. The stock market's year-to-date return is better than 83% of comparable year-to-date returns for all years since the late 1890s.

Might these poor odds be overcome because 2024 is a presidential election year? Unfortunately not. The magnitude of the maximum possible summer rally has not been significantly different in election years since 1896 than in all other years.

So, U.S. stocks may post impressive returns between now and Labor Day. But if that happens, it will be for reasons other than a summer rally.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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05-20-24 1051ET

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