The Word from Main Street
Market Update for the Week of June 1, 2020
Summer doesn’t officially begin for a few more weeks, but many Americans recognize Memorial Day as the unofficial start of the season. While this summer is likely to be far from normal, we typically associate the season with warm weather, beach vacations, and longer days. However, in the investment world, the summer months are associated with lackluster returns, also known as the "Summertime Blues". This year, we enter the summer months coming off one of the most volatile starts to a year ever. The major indices have rebounded strongly off their March bottoms with the S&P 500 (SPX) and DOW (DJIA) now down -6.03% and -10.48%, respectively, for the year (through 5/27/20). Meanwhile, the Nasdaq (NASD) is in positive territory for the year with a return of +4.9%. (Source: Nasdaq Dorsey Wright)
The table below shows the returns of both the Dow Jones Industrial Average and the S&P 500 during the summer months (May 31st to August 31st) back to 1981. The S&P 500 and the Dow Jones Industrial Average have each finished in negative territory in 15 of the past 39 summers (or about 38.5% of the time). Of those 15 down summers, there were 13 summers in which SPX and DJIA were both down at the same time. While less than half of the summers have been negative for these benchmarks, the bad summers were indeed bad with some down double digits over the three-month period. For instance, in the summer of 1990, the SPX fell -10.69%. In 1998, it saw a drop of -12.24%, but the worst summer came in 2002 during the tech crash when the index declined -14.16%. During the summer of 2008, which began a famously longer slide, SPX fell -8.39%. The market has bucked the trend recently, however, as both indices have posted gains during the most recent four summers. (Source: Nasdaq Dorsey Wright)
In an effort to determine if there is one month that tends to have an outsized effect on summer returns as a whole, Nasdaq Dorsey Wright compiled a monthly summary of S&P 500 returns going back to 1958. What they found was that the summer months tend to have a lower median return than most of the other months of the year. Historically, the month of September has provided the lowest median return at -0.30%, but it is closely followed by June, which has a median return of just +0.05%. Notice that the spread, the max return in a given month versus the minimum return in a given month, is relatively low for the summer months (mainly June and July). A closer look at the month of June reveals a max return of +6.89% in the last 60 years, which it posted last year, but also followed a May return of -6.58%. Every other month, except February, had a maximum return in excess of +8%. Clearly, June has historically been one of the weaker months for SPX returns. However, we can't blame the Summertime Blues on June alone. August has experienced the second-largest drawdown (after October) at -14.56%, which compares unfavorably to the other months' minimums, which seem to hover around -10%. The data below indicates that the Summertime Blues cannot be traced back to just one month.
To take this concept one step further, Nasdaq Dorsey Wright looked at four hypothetical portfolios specific to each of the four seasons. Defined as follows:
Winter Portfolio Dates: 11/30 - 2/28
Spring Portfolio Dates: 2/28 - 5/31
Summer Portfolio Dates: 5/31 - 8/31
Fall Portfolio Dates: 8/31 - 11/30
The summer portfolio greatly underperformed the other three seasons - fall, winter, and spring. According to Nasdaq Dorsey Wright, if you were to invest only during the spring months (March through May), the initial investment would have had a cumulative return of +375% from 1958 through 2019, making it the best performing seasonal portfolio. On the other hand, the summer months pale in comparison to the others, gaining a measly 46% since 1958.
While this historical data provides some perspective for what we might normally expect this summer, given the current environment we’re in with regard to COVID-19 and the phased reopening of the U.S. economy, the months ahead could look vastly different from years past. Below is the most recent high frequency data showing where we are in the economic recovery. Although the year-over-year (YOY) comparison will be awful for many more months, the month-over-month (MOM) and week-over-week (WOW) comparisons continue to show signs of green shoots.
Source: First Trust Advisors
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CAR-0620-00175Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.Past performance is no guarantee of future results. All investing involves risk including the loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of Wells Fargo Advisors or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 12/16/19. Additional information is available on request. Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolio across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of Main Street Wealth Advisors and are not necessarily those of Nasdaq Dorsey Wright, Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Main Street Wealth Advisors is a separate entity from WFAFN.