It’s hard to make money from seasonal trends like the summer market doldrums

If you’ve been investing for a number of years, you’ve probably heard of the “summer market doldrums”. Some investors take this to refer to the sluggish periods that the market goes through every summer. That same sluggishness appears in other businesses. In both cases, it has something to do with the timing of customer vacations.

Other investors think of the summer market doldrums as the source of the market’s seasonally weak performance between May and October. Since 1926, stock market returns from May through October have been around half of what they were in the rest of the year. It’s the source of the old-time market saying, “Sell in May and go away.”

“Sell in May and go away” or hold steady?

This saying is based on the observation that, over the years, stock prices have often gone sideways or dropped between May and October. This year, some investors feel the sell-in-May rule is timely. The market has been on a long upward trend, so investors may see it as due for a setback.

The problem with this kind of analysis is that it fails to distinguish between causation and correlation. The pattern of falling stock prices between May and October may simply be a coincidence, like the pattern that may appear in a series of coin tosses or spins of a roulette wheel.

Many investors have guessed right about a coming trend at one time or another. Maybe they bought just prior to a big upswing, or sold in advance of a major stump. In the long run, however, these experiences may wind up costing them money. They may bet twice as heavily on the next trend they foresee, with more volatile stocks, only to discover their forecast was 100% wrong.

Defensive stocks can protect your portfolio against economic or stock market downturns

Defensive stocks in the Consumer sector can provide the most effective protection against economic downturns or summer market doldrums. That’s a key difference between Consumer stocks and companies in the Manufacturing & Industry or Resource sectors, which are far more sensitive to the ups and downs of the economic cycle.

As a general rule, resource stocks provide the most effective hedge against inflation because they directly gain from rising prices of the commodities they produce. Utility stocks used to provide a hedge of sorts against recessions, due to their steady earnings and dividends. However, that is less true today because of changing technology and deregulation in the utility sector.

Although it pays to be aware of these general tendencies, you should resist the temptation to fine-tune your portfolio according to theories or predictions about inflation and economic downturns. No one has ever consistently predicted either one, either in timing or degree, so most investors will want to include stocks from most if not all of the five economic sectors in a well-balanced portfolio.

We like high-quality blue chip consumer product companies because they can provide stability during a recession or economic slowdown

Strong consumer product companies have similarities, like a record of rising cash flow and strong balance sheets. These are characteristics of blue chip stocks.

Below are three safety factors we like to see in companies when we look for overall investment quality.

• Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
• Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
• Freedom to serve (all) shareholders. High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

The summer market doldrums and seasonal trading programs

I’ve seen a number of vague warnings that sharp market downturns have followed sluggish periods like the one we’ve seen lately. I’m sure that’s true. However, sharp market upturns have followed other sluggish periods.

Even when seasonal tendencies seem clear in historical records, they can still disappear without warning, or reverse themselves. That’s why few investors have ever managed to make money with seasonal trading programs. I suspect that on the whole, investors have lost more money than they’ve made with that kind of trading.

You’ll never find a simple, fits-on-a-T-shirt rule for picking stocks or beating the market. That’s because the market responds to a variety of factors and influences, but it does so inconsistently. Each relevant factor matters a lot more in some years than others. That’s why we use a wide range of information to make investment decisions.

Have you experienced the summer market doldrums? What strategy have you deployed in the past? Share your experience with us in the comments.