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Belief in a Summer Stock Rally lingers. Here’s what we can learn from this myth.
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In October 2022, the stock market officially fell into a bear market, meaning it was down 20% from its most recent high. The market remained in hibernation for 164 long days. By early June, the market had rebounded by 20%, pushing it back into bull market territory. Days later, the Bureau of Labor Statistics announced that inflation had cooled to 4%, the lowest inflation rate in two years.
Some refer to the bounce as a Summer Rally. According to the myth of the Summer Rally, the Dow Jones industrials hit bottom sometime during May and June, only to close higher in July, August, or September. Tales of a Summer Rally have been repeated so often that entire sales pitches are built on the notion.
Here, we’ll look at what all this means for you.
They’re right, sometimes
Between mid-June and mid-August 2022, it was easy to believe the Summer Rally was more than a myth. After all, the S&P 500 soared by more than 17%, and the Nasdaq-100 rallied by nearly 23%. Brokers were more popular than ever.
However, that’s not always the case. According to a fundamental analysis by WallStreetZen, the worst months for the Dow Jones Industrial Average are June, August, and September. In other words, all but one summer month, leading to one conclusion: Even if a Summer Rally were guaranteed, there would be no way to predict which month it would hit. You could easily believe your investments were at their peak in June, only to sell before they hit their true high.
What the myth of a Summer Rally teaches us
Who among us would not love to know when the market is about to dip? How much easier would investing be if we knew when a stock was about to soar into the stratosphere? Unfortunately, that’s not the way it works. The Summer Rally teaches us that we can look for patterns, but we can’t count on them to guide us.
What we can be sure of is that history has rewarded those who buy and hold. Those who invest with the goal of letting it ride, accepting that there will be highs and lows, are the ones who’ve prospered throughout history.
Over the past 50 years, the S&P 500 has produced an average annualized return of 9.4%. And considering all that has occurred over those 50 years, the results have been remarkable. In addition to wars in Southeast Asia, the Persian Gulf, Afghanistan, and Iraq, there have been numerous corporate bankruptcies and breakups, the 1973 OPEC oil embargo, the resignation of a U.S. president, and seven recessions.
Through it all, there have been (sometimes huge) drops in the stock market, but there have been even larger gains. Attempting to time our investments rarely works the way we hope it will. When the investment firm Merrill Lynch looked at model portfolios, it found that over 30 years, market-timing portfolios routinely underperformed buy-and-hold portfolios.
The takeaway
Don’t be surprised if you hear someone say how important it is for you to get in on the Summer Rally. It’s a myth that seems to stick around. When you hear that advice, remember the value of investing in companies you believe in and allowing your investment to ride through both good times and when the market takes a hit. Statistically speaking, you are likely to come out ahead.
Moving money from our checking account to a brokerage can be scary for some of us. If you find yourself paralyzed by indecision, talk to your broker about boosting your bond allocation to reduce risk. And if you’re worried that you’ll miss a huge bounce in the market, make it a habit to invest regularly so that whenever an upswing hits, you’ll have skin in the game.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
