July: Statistically lackluster

July is the first month of the third quarter, which tends to make it the strongest month of the quarter. The start of the second half brings investment inflows at the top of the month. Yet, the implication is that any July rally is suspect because of less constructive activity later in the summer.

Given the likely weakness after the end of April on the seasonal weakness beginning in May, July rallies tend to be upside reactions within the generally weak summer tendencies. And the problem for any expectations of a July rally this year is the U.S. presidential election. As modest as the gains in the “Vital statistics” table appear, in general election years they are roughly a full percentage point worse for each of the major indexes. 

In spite of the historic underperformance between May and October, market mythology includes the expectation of a “summer rally” when the equities have suffered at all from May into June. The Stock Trader’s Almanac notes: “Such a big deal is made of the ‘summer rally’ that one might get the impression that the market puts on its best performance in the summertime. Nothing could be further from the truth! Not only does the market rally in every season, but it does so with more gusto in winter, spring and fall than in the summer.” 

Equities can rally in summer. But, over the last 52 years winter hosts the strongest seasonal rallies with an average trough to peak gain of 12.9%, followed by spring at 11.3% and fall showing an average 10.9% gain. Summer brings up the rear at 9.2%.

So while there can indeed be a rally in any season, anticipating any upside summer potential just because of cheaper values after any May and June selloff generally is not the most effective approach; especially in U.S. general election years.