It’s that time of year again. We’ve entered the period between Memorial Day and Labor Day — the time when the professional money managers head to the beach and the rest of us struggle to find compelling trading ideas.
The summer is known for bringing low volume and quiet Fridays, but — if the past 10 years is any indication — it also should be recognized for some anomalies in sector performance. An analysis of the performance of the key sector ETFs, plus the PHLX Gold/Silver Index (XAU), reveals some notable summer trends from the past decade.*
- The SPDR S&P 500 ETF (NYSE: SPY) has delivered an average annual return of 4.17% during the past 10 years, but it has averaged a loss of -1.57% during the three summer months. Nine of the 10 major sector ETFs also have experienced losses in the summer, but Select Sector Utilities SPDR (NYSE:XLU) has proven to be a safe haven with an average gain of 1.03%.
- Somewhat surprisingly, precious metals stocks also have been winners in the summertime, based on the average gain of 1.21% for the XAU. The index also experienced positive returns in seven of the 10 calendar years, more than any of the 10 sector ETFs. With the XAU off more than 20% year-to-date, precious metals stocks might provide a contrarian opportunity this summer if fear begins to recede from the markets.
- The weakest summer performers of the past 10 years (in terms of absolute returns) are the iShares Dow Jones U.S. Telecommunications Sector Index Fund (NYSE:IYZ), with an average return of -2.9%; Select Sector Financial SPDR (NYSE:XLF), -2.56%; and Select Sector Consumer Discretionary SPDR (NYSE:XLY), -2.08%.
- Aside from utilities, the sector ETFs that have performed best in the summer months are: Select Sector Consumer Staples SPDR (NYSE:XLP), -0.33%; Select Sector Health Care SPDR (NYSE:XLV), -0.43%; Select Sector Materials SPDR (NYSE:XLB), -1.15%; and Select Sector Energy SPDR (NYSE:XLF), -1.17%.
- Certain sectors also have meaningful gaps between their performance versus SPY in the summer months compared to their average annual performance during the full 10-year period. In fact, four sectors show such a divergence:
1) Health Care: In the 10 years ended on May 29, 2012, XLV’s average annual return of 3.6% has lagged the 4.17% return for SPY. However, its average return of -0.43% in the three summer months has beaten the -1.57% showing for SPY. This shows that health care has been more likely to beat the market during the summer than it has over the full period.
2) Technology: Select Sector Technology SPDR (NYSE:XLK) has trailed the market in the summer (-1.75% vs. -1.57%), compared with meaningful outperformance (5.45% vs. 4.17%) on an annual basis.
3) Consumer Discretionary: XLY has underperformed in the summer months with an average return of -2.08%, versus comfortable outperformance (5.39%) for the full year.
4) Industrials: Select Sector Industrials SPDR (NYSE:XLI) has lagged SPY in the summer with an average loss of 2%, which contrasts with its outperformance (5.1%) over the entire period.
Does this mean investors should load up on health care and short technology, consumer discretionary and industrials? Not quite. The range of performance disparities is huge on a year-to-year basis, as would be expected, and in some cases the averages are thrown off by outlier results due to the relatively brief, 10-year period under review. And of course, nobody knows what impact Europe will have on the markets this summer.
Still, this might provide a starting point for investors who are looking for trading ideas in the months ahead.
*Summer, in this case, is defined as the period from the last trading day in May through the last trading day of August. Ten-year returns are average annual returns from May 29, 2002, through May 29, 2012.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.