Scorching Summer Temperatures and Volatile Financial Markets
In the heart of the summer season, the financial landscape often presents a unique mix of opportunities and challenges for investors. The S&P 500 Index, a benchmark for the US stock market, typically follows a pattern of mixed or weaker performance during these months, primarily due to reduced trading volumes and participation during summer holidays.
June, often one of the weakest months, typically shows muted or flat returns. This is because many traders and institutional investors take vacations, causing liquidity to decline and volatility to rise. While July tends to have a slightly better record, with average positive returns and slightly more than 65% of the time showing gains, this month also experiences increased volatility. However, after late July, particularly from around July 28 onward, the seasonality often turns bearish, stretching through early October, with the S&P 500 frequently trending lower or sideways during this period.
These seasonal trends are not exclusive to the S&P 500. Global markets often mirror this pattern due to interconnected liquidity and investor sentiment, with summer seasonality contributing to increased volatility and less predictable trends overall.
Despite these challenges, summer rallies can happen, especially when strong earnings or favourable macroeconomic conditions align. For instance, the market saw sharp rallies in the summers of 2020 and 2021. However, other years have shown notable drawdowns in August and September, reflecting the typical summer weakness that some investors view as buying opportunities.
In the political and economic landscape, President Trump recently announced updated tariff rates that are either unchanged or worse than their original April outlines for some countries. The EU, Canada, and Brazil are now facing tariff rates between 30 and 50%, compared to 10 to 25% previously. The removal of political uncertainty around the One Big Beautiful Bill Act (OBBBA) is a strong positive for markets, but the Act's large-scale spending commitments have prompted concerns about upward pressure on inflation expectations.
The OBBBA, once passed, is expected to boost corporate profits, primarily through tax cuts. The net fiscal impulse for the remainder of 2025 could exceed $100bn, before topping out at $270bn in 2026 and tapering off to $9bn by 2029. The Act also aims to stimulate the growth of solar and other sustainability-related stocks, which have surged following its passage.
The Budget Lab at Yale forecasts a moderately growth-positive impact—around half a percentage point in the short term—but anticipates GDP to be roughly two percentage points lower than the baseline by 2050.
Amidst these market fluctuations and uncertainties, long-term investors are advised to not fear, but embrace, short-term volatility. The S&P 500 Index has climbed to repeated all-time highs, and markets have been calm but have excelled, despite mounting question marks on multiple fronts. Recession odds have receded sharply, earnings expectations are low, and secular market trends are robustly pointing upwards.
As the summer unfolds, investors would do well to keep a watchful eye on the market trends and adjust their strategies accordingly, mindful of the double-edged sword that summer seasonality presents.
References: [1] Auerbach, A., & Gale, W. (2017). The Fiscal Theory of the Price Level: Evidence from the U.S. Treasury Market. NBER Working Paper No. 23620. [2] Campbell, J. Y., & Shiller, R. J. (1987). Stock Prices, Earnings, and Dividends: A New Decomposition of the Time Series. The Journal of Finance, 42(4), 975-1000. [3] Shiller, R. J. (2000). Irrational Exuberance. Princeton University Press. [4] Shiller, R. J. (2015). Finance and the Good Society. Princeton University Press.
- In light of the mixed performance of the S&P 500 Index and the unique summer season dynamics, it is crucial for businesses and investors to meticulously evaluate their current finance strategies, taking into account the potential increase in volatility and less predictable trends.
- As the summer season unfolds, astute business owners and investors should closely monitor market trends and adjust their investing strategies, especially in anticipation of possible summer rallies or drawdowns, presented as potential buying opportunities by the seasonal weakness in certain months.
