On Thursday, the CDC said vaccinated Americans can ditch the masks in most settings, kicking off what some people are calling a “hot vax summer.”
Unfortunately, that could mean a cold, rocky few months for the stock market.
The period between Memorial Day and Labor Day has historically been one of the S&P 500’s weakest stretches of the year, plagued by low volumes, directionless markets and unexpected selloffs.
Summer seems to have started a little early with this week’s selloff. The S&P 500 fell as much as 4.2%, clocking two drops of 1% or more after going nearly two months without any.
Now, with many of us itching to get away, we need to talk about what the stock market could look like as the U.S. goes into vacation mode.
A Summer Slowdown
Since 1990, the S&P 500 has risen an average of 0.9% between Memorial Day and Labor Day each year, compared to 3.6% average returns in the months before Memorial Day and 4.2% returns in the months after Labor Day. It’s a big reason why Wall Street likes to say, “Sell in May and go away.”
Trading also tends to drop off in the summer months as people flip their out-of-offices on and get away. Let’s be real: You’re probably not thinking much about the markets when you’re chilling on the beach. And this year, we’re all just that much more excited to get out of our houses and make those summer plans we missed out on in 2020.
It could be a fun few months for your social life, but a rocky few months for the market. In a low-volume environment, bad news tends to hit a bit harder, and small shifts in buying or selling could lead to noticeable market swings. We’ve seen that in a few recent summer meltdowns, like the S&P 500’s 11.8% slide when Standard & Poor’s cut the U.S.’s credit rating in 2011, or the index’s 9.6% drop in the summer of 2015 during Greece’s financial woes and China’s currency devaluation.
Some summers can be better than others, and stocks have bucked the summer trend in recent years. The S&P 500 has risen between Memorial Day and Labor Day for five straight years — the longest streak since 1995. Last year, the index even gained a casual 16% during the summer.
This summer, investors could be extra skittish as worries mount of an inflation spike or Fed policy change. While we still think these are low risks, we can tell the market’s mindset has changed from “What could go right?” to “What could go wrong?” That could lead to quick selling on surprise headlines, and this week’s inflation data and pipeline hack showed us this market could be extra sensitive to surprises.
Surviving the Summer
So how can you be your best investing self this summer?
Here are a few ideas:
Fight that bias.
The market has been unusually quiet and strong for the last six months, and that could be why this week’s selloff was a shock to the system. Our brains are primed to assign greater importance to how the market has acted recently, rather than how it’s acted in more normal times. That’s called recency bias.
Life is getting back to normal, so we’d expect the market’s patterns to look a little more typical, too. What does an average year look like for the stock market? A return of about 9% with about two 5% drops (and even bigger pullbacks on occasion).
Dig for treasure.
Treasure is always out there, but you have to dig for it. There’s usually a push and pull in the market during a selloff between stocks with different risk profiles. Right now, high-flying tech stocks are getting pounded, with stocks like Twitter, Etsy and Tesla down more than 30% from their peaks. But consumer staples, health care and utilities stocks have escaped relatively unscathed.
On a down day, the stock market rarely falls across the board. In fact, there’s only been one day in the last 20 years when no S&P 500 stocks rose (August 8, 2011, the U.S. credit downgrade). On Monday, about 44% of S&P stocks reached 52-week highs, even though the index itself fell 1%.
Stash some cash.
Cash gets a bad rap these days, but it’s an underrated tool that helps you stay agile when stocks are falling. Wise investors don’t try to time the market, but they do keep cash on hand in case a buying opportunity arises.
Long-term investors don’t have to be as afraid of buying in during a downturn, either. Market pullbacks are your best friend when you’re planning to keep your money invested for several years. And in a strong economy like we’re seeing right now, there may be an even better argument for buying the dips.
Since 1950, the S&P 500 has logged better average 1-month, 3-month, 6-month and 1-year returns when it’s fallen 5 to 10% below its peaks in bull markets.
Average Forward S&P 500 Returns in Bull Markets Since 1950
|Distance From 52-Week High||1-Month Return||3-Month Return||6-Month Return||12-Month Return|
|More Than 10%||2.9%||7.9%||15.0%||23.2%|
|5% to 10%||1.9%||4.7%||7.4%||13.4%|
Source: Ally Invest, Standard & Poor’s
The Bottom Line
This summer, we all deserve a little break.
But don’t let the low-volume summer swings throw you off your mental game. Market ups and downs are a normal part of investing. And while selloffs don’t feel great in the moment, they’re a necessary reality check as we move into a more normal post-pandemic world.
If you’re actively looking for opportunity, these next few months could be a good time to find it.
If you’re a long-term investor with goals years down the road, this summer could give you a chance to buy stocks for cheap, in hopes that an extended economic recovery will eventually take this market to even higher prices.
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