By Sam Stovall
Looking for fireworks this summer? You might find them at the beach or the ballpark. But if history is any guide, investors would do well not to expect any from the stock market during June, July, and August. Maybe Wall Street should just take the summer off.
Indeed, a look at the seasonal performance table below shows that the market tends to slip into neutral, if not reverse, during June through August. (For our purposes, autumn is defined as September to November, winter as December to February, and spring as March to May.) They're not called the summer doldrums for nothing.
INVESTOR APATHY. As the table shows, the Standard & Poor's 500-stock index posted an average decline of 1.2% (excluding dividends) during the summer from 1990 to 2004. (S&P's GICS -- Global Industry Classification Standard -- has S&P 500 sector and subindustry information dating back to 1990.) What's more, all 10 sectors in the S&P 500 -- as well as the growth and value components of the index -- posted average declines, ranging from a 0.2% dip for the S&P Information Technology sector to a 3.7% slump for the Consumer Discretionary stocks.
To gauge each sector's performance in context, the table also includes a column labeled F.O., which stands for "frequency of market outperformance." That serves as an indication of how consistently the sector beat the S&P 500.
At first glance, no one should be surprised to see the S&P 500 and its components post their poorest performances during the summer, when it seems investors worry more about their tans than their portfolios. Plus, it marks a period of little capital inflow, as additions to IRAs and reinvested tax refunds tend to occur in the first few months of the new year. These seasonal tendencies have become common knowledge to experienced investors, in S&P's opinion.
GO-GO GROWTH EFFECT? Yet several contradictory signals did jump out from the results, in S&P's view. First, the S&P Growth index did much better than the Value index during the summer, when one might have expected a rotation toward safe havens during typical periods of market weakness. Indeed, the growth component bested the value grouping in three of four seasons.
Carrying the defensive mind-set one step further, in our view it's also interesting that the sectors with the best relative performance and F.O. were Information Technology and Financials, respectively, rather than any of the traditionally "defensive" sectors of Consumer Staples, Health Care, and Utilities.
These groups have earned that label since the demand for their products and services remains fairly static during good times and bad. A possible answer is that the go-go growth years of the late 1990s -- when tech stocks did well regardless of the calendar -- heavily influenced the 1990-2004 period.
This lack of defensive leadership also appears to carry down to the subindustry level, as seen in the table below. Even though all five of the worst-performing subindustry indexes came from the economically sensitive areas of Information Technology and Consumer Discretionary, the winners were scattered among the Consumer Staples, Health Care, Information Technology, and Materials sectors.
Summer's Best and Worst Subindustries, 1990-2004
Avg. % Chg.
Health Care Equipment
Diversified Metals & Mining
Movies & Entertainment
PREPARE A STRATEGY. So, how should the average investor employ this information? First of all, we believe history should serve as a guide and not gospel, because it doesn't always repeat itself. The only significant conclusion one should draw from this analysis is that the summer months are consistently challenging for equity investors.
But as the old saying goes, forewarned is forearmed. A historical perspective may prove useful in understanding market patterns. And that may ultimately help investors ride out short-term gyrations, thus allowing them to stay the course and achieve their longer-term goals.
S&P 500 Benchmark & Sector Index Performances by Season (1990-2004)
S&P 500 (GROWTH)
S&P 500 (VALUE)
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Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) and their proxies (the highest STARS-ranked companies in the subindustry index -- tie goes to the largest market value) as of June 10, 2005.
S&P High Momentum Portfolio -- 6/10/05
S&P STARS Rank
Diversified Metals & Mining
Fertilizers & Agr. Chem.
Managed Health Care
Oil & Gas Drilling
Oil & Gas Equip. & Svcs.
Oil & Gas E&P
Oil & Gas Refg. & Mktg.
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.
Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Stovall is chief investment strategist for Standard & Poor's