Wrong question. The right question should be, “Is there such a thing as 'The Summer Rally?'" And the answer would be: Only in Wall Street advertising copy and on the Cluelessly Negligent Bull Channel.
Last year, for the first time in a long time, there actually was a substantial rally that took place over the summer. But the same rally also took place over the spring. And the fall. And the winter of 2009-2010. But that was the knee-jerk, "the train is leaving the station" rally that followed a plunge from 14,000 to less than 7,000. If you are expecting a repeat this summer, I wish you good luck.
Our clients are fast approaching 50% in cash equivalents like boring short-term bond funds like MINT, PCY, JFR and BHL, inflation-protected securities like TIP and WIP, precious metals like GDXJ and Rubicon Minerals (RBY), select agriculture and energy ETFs like SGG, ENY and IEZ, special situations like Exxon (NYSE:XOM), Statoil (NYSE:STO) and Royal Dutch Shell (NYSE:RDS.B), and a dollop of short-side ETFs like SDS, EUM, VXX and RWM.
The Summer Rally is a popular fiction from Wall Street, plain and simple. While it is true that the stock market could rally sometime during the summer months off on oversold low, the same could be said for any month of the year!
Why is it important to keep this fiction alive? Remember Occam’s Razor. Don’t look for complicated solutions when the very simplest of answers may fully explain a phenomenon. I believe it’s important for Wall Street to pump the idea of a summer rally because it is hot, muggy and uncomfortable in Manhattan during the summer. It’s so much more pleasant to be sailing or yachting off your place in the Hamptons during July and August. If you can keep the mooks believing in The Tooth Fairy, The Easter Bunny and The Summer Rally, things won’t fall apart while you’re on the boat and they’re slaving away in the heat.
Since the institutional movers and shakers are out there taking the summer off, rallies tend to be subdued at best. But even an attempt at a rally still gets the Headlines Editors all ga-ga and carries on the notion of The Summer Rally. For a more cool-headed appraisal of such things, check out this chart from Forbes, covering the 46 years from 1962 until 2008:
You’ll note that the months of May, June, and July, over the past nearly half-century, actually provide the least attractive rallies off their low points, with August and September not far behind!
Or, as Yale Hirsch wrote in "The Stock Trader's Almanac":
Such a big deal is made of the 'summer rally' that one might get the impression the market puts on its best razzle-dazzle performance in the summertime. Nothing could be further from the truth! Not only does the market 'rally' in every season of the year, but it does so with more gusto in the winter, spring, and fall than in the summer.
I agree that yachting is probably more fun than working, but here’s where Wall Street’s disingenuous sales pitch really hurts: There are a lot of new or less experienced investors out there who may be sucked in by this false propaganda and feel as if they are missing something if they don’t stay fully invested throughout the summer – for fear of missing the “big rally” if they do. This does them a real disservice to them and places them, like it or not, into another waste can Wall Street likes to push: “buy and hold.”
Now, before I get the usual hate-mail for disparaging buy-and-hold from the True Believers, please note that there are positions we’ve held for more than 10 years in our Model Portfolios in Investor’s Edge ®. However – they are few and far between. I have demonstrated in previous articles that buy-and-hold proponent Warren Buffett’s top investments are today selling for less than they sold for 12 years ago. Maybe 12 years isn’t long-term to you. When I was 25, it may not have been to me. But most investors become serious investors as they acquire assets after a lifetime of work. If you are 65 and planning to live better when you are 77, it does you no good to have bought and held only to see every security down in value and the dividend income you received eaten up completely by inflation and taxes.
The purpose of this article is straightforward: invest however you like. Just do it with a knowledge of all the facts, not because you have a need to be a True Believer in one cult or another. I happen to believe that reallocating assets once or twice a year, based upon market history, current conditions in the world, and changing circumstances within a sector or a particular company, makes sense.
You don’t have to share that opinion. But, for your financial well-being, you might want to cut and paste that chart above so you can look at it every time Wall Street tries to suck you in with yet another false promise.
Author's Disclosure: We are in cash equivalents like very short-term bond funds and inflation-protected securities, precious metals, select agriculture and energy ETFs, special situations, and a dollop of short-side ETFs.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but we are flat in 2010. We plan to be back on track as the year progresses and we put our cash to work but “past performance is no guarantee of future results”!
We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. There are only two ways you see our work at this site: by your choosing as a result of seeing an article or by taking the recommendation of another reader. In either case, we take seriously our responsibility to proffer intelligent commentary, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.