Strong Markets Lead to Weak Stock Gains in the Summer

U.S. stocks could see gains this summer, but that doesn't necessarily mean a typical "summer rally" will occur.

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This distinction is crucial to understand the increasing buzz about an imminent summer rally on Wall Street. Despite the chatter, no commentator has clearly defined what a summer rally entails. Given that the U.S. stock market will inevitably experience some upward movement between Memorial Day and Labor Day, even if just for a few days, these commentators seem insulated from ever being proven wrong.

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To challenge the notion of a summer rally, we can compare the theoretical maximum rally during the summer months with the maximum gains from other three-month periods throughout the year. This comparison reveals that summer is not particularly exceptional.

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The analysis can be seen in the accompanying chart. Focus on the column for May, which shows an average gain of 7.3% from the end of May to the highest stock market close over the next three months (through the end of August). This average is based on the performance of the Dow Jones Industrial Average (DJIA) since its inception in 1896.

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This gain is hypothetical because it would require foresight to know when the market will reach its highest point during the summer. However, calculating it this way demonstrates the maximum potential gain from a summer rally.

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When compared to similar statistics for other months, the 7.3% gain is not particularly notable. Although the summer rally's average potential gain is slightly higher than the 6.6% average for all three-month periods, this difference is not statistically significant at the 95% confidence level commonly used to verify patterns.

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Summertime Realities

These findings alone cast doubt on the expectation of a summer rally. Additionally, this year presents even fewer reasons to anticipate one.

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This skepticism stems from the observation that the potential gain from a summer rally tends to be lower when the stock market's year-to-date return has already been strong. So far this year, the stock market has performed exceptionally well, with the Dow reaching 40,000 for the first time. The year-to-date return is better than 83% of comparable returns since the late 1890s.

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Could the odds improve because 2024 is a presidential election year? Unfortunately, no. Historical data since 1896 shows that the magnitude of potential summer rallies in election years is not significantly different from other years.

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Therefore, while U.S. stocks might achieve impressive returns between now and Labor Day, attributing such gains to a "summer rally" would be misleading. Any positive performance during this period will likely be driven by factors other than the concept of a seasonal rally.

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In summary, while the stock market could continue its upward trajectory this summer, calling it a "summer rally" is not statistically justified. Historical patterns do not support the idea that summer months provide exceptional gains compared to other periods. This year, with a strong year-to-date performance already in place, the likelihood of an extraordinary summer rally is further diminished. Therefore, any market gains in the coming months will likely arise from broader economic conditions and not from a seasonal trend.

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