Key insights
- Historically, the Federal Reserve's summer silence between June and September leads to lower trading volumes and a rotation towards defensive stocks, often causing market stagnation or declines. While July has historically been strong for the S&P 500 due to earnings and lack of rate hike fears, August and September tend to be weaker. However, for long-term investors, these seasonal trends have minimal impact on overall annual returns.
During the summer, the Federal Reserve "goes silent" between its mid-June and late-September policy meetings. Without the Fed giving any clear economic indicators through its interest rate decisions, investors typically trade less frequently. Let's review what typically happens during these "summer doldrums" and whether they impact long-term investors.
As trading volume declines during the summer, many investors take profits in their higher-growth stocks and rotate toward slower-growth defensive plays. That rotation, along with a lack of near-term catalysts from the Fed, often causes stocks to stagnate or slip lower. That's why some investors still "sell in May and go away."
However, that classic mantra shouldn't matter much to long-term investors, given that the S&P 500 has generated an average annual return of about 10% since its inception in 1957. Anyone who repeatedly sold their stocks in May likely underperformed the broader market.
If you had simply invested in Vanguard's S&P 500 ETF (VOO +0.23%) ten years ago and reinvested its dividends, you would have turned a $10,000 investment into about $42,500. It achieved that gain even as the COVID-19 pandemic, inflation, high interest rates, and geopolitical conflicts rattled the global economy. So if you're planning to hold your stocks for years instead of quarters, it's silly to fret over the Fed's summer silence every year.
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But even if you're not too concerned about the summer doldrums, you should be familiar with some of the market's historical trends during this period. Without the immediate threat of a Fed rate hike, July has historically been the best month for the S&P 500. Positive corporate earnings during this month also tend to amplify those gains.
However, August and September are generally the weakest back-to-back months for the benchmark index as investors rein in their bets ahead of the Fed's September meeting. Another unpredictable factor is the Jackson Hole Economic Symposium in late August, which often gives investors a few hints regarding the Fed's upcoming rate cuts or hikes.
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Therefore, long-term investors should realize the market's gains in July will probably wane in the late summer, and they shouldn't blindly follow the herd to the exits. They should certainly keep track of the Fed's interest rate decisions, but they should realize that the top countries in America still flourished through wild interest rate swings over the past few decades.