Charles Schwab: Summer Trading Vacation Theory Doesn't Always Pan Out

July 16, 2018 — 10:44 AM EDT

When it comes to vacationing, the conventional wisdom long held that the summer months were the best time for investors to take a break from trading. After all, the three months between Memorial Day and Labor Day are often the period in which families go on vacation and companies slow down. But it turns out that the idea may be more of a myth than science. 

According to analysis from Charles Schwab, 90% of the time that the markets were having a good year, they also did well during the so-called three-month slowdown. This is not to say that the markets were increasing like gangbusters over the summer, but they were up rather than down. "It's not true that people lose money from Memorial Day to Labor Day, but at the same time, if you are trying to time the market, it doesn't do a whole lot at all with the average return of 1%," said Randy Frederick, vice president of trading and derivatives at The Charles Schwab Corporation's (SCHW) Schwab Center for Financial Research. "It's not a losing period. It's an underperforming period."

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Vacations Abound During the Summer

Undoubtedly, the summer months are a favorite time for people to go on vacation, which traditionally slows down investments and trading. But Frederick said that the notion of a summer slowdown could also be a bit of a self-fulfilling prophecy, given people tend to react to what they believe is true. So, if the summer is thought to be a slow investing period, investors may opt hold back as well based on that premise.

To prove or disprove the old adage "sell in May and go away," the Schwab executive looked at the period between Memorial Day and Labor Day every year since 1950 and found that the S&P 500 Index went up in 50 of the 67 years overall and was up between Memorial Day and Labor Day in about 45 of the years. That translates into the S&P 500 being up 90% of the time during those so-called slow months.

Summer Returns Tend to Be Muted

Peeling back the onion a little more, Frederick found that, even though there were summer gains in most of the years, they weren't anything to write home about. The average yearly return during the 67 years was around 13%, but for the period between Memorial Day and Labor Day, the average return was an anemic 1%. "That means, while the period from Memorial Day to Labor Day was not generally a losing period, it was a period of significant underperformance. And that means most of the market's gains usually happen from September through May," said Frederick.

Given the muted returns during the summer, investors can't be blamed for taking a break. But if they do so this time around, they may see more movements in their portfolios than they are used to. With volatility back in the markets and with geopolitical unrest rising at the same time as trade tensions are increasing, the summer months may still prove to be a volatile time for investors. For active traders, that could spell opportunities, albeit small ones.

It doesn't help that the economy could be entering the late stages of the cycle, which means that earnings growth may have peaked in the first or second quarter of this year. When that happens, investors tend to become more sensitive about the news and react more often, even during the summer. Mobile trading also works against the idea of a slowdown as family vacations ensue during the summer months. The ability of countless people to trade on the go via their smartphone is helping keep the pace up throughout the year.  

Still, Frederick said what stands out most is that, in the years when the market is underperforming, performance in the summer months tends to be a bit worse. And in the years when the markets are doing okay, stocks increase in the summer but not nearly as much as between September and May. For example, during the 2008 meltdown, the market lost only 8%, but between Memorial Day and Labor Day, it was down 37%.