ClearBridge Investments suggests robust corporate earnings should continue to provide a solid market foundation, making investors inclined to continue to “buy the dips” should pullbacks emerge. Below is a summary of the most recent Recession Indicators report:
Key Takeaways: According to Jeff Schulze, CFA, Head of Economics & Market Strategy with ClearBridge Investments:
~ Consumer and corporate resilience in the face of higher energy costs have supported stock markets, with the S&P 500’s April and May returns ranking among the top 10 strongest two-month stretches since 1950.
~ The Profit Margin indicator on the ClearBridge U.S. Recession Risk Dashboard improved last month from yellow to green, and the overall signal remains in green territory.
U.S. Recession Risk Dashboard
Source: ClearBridge Investments
Although summer doesn’t officially begin for about another two weeks, many Americans recognize Memorial Day as the unofficial start of summer. Many of us are looking forward to the warm weather, beach vacations, and the other usual summer activities. However, in the investment world, the summer months are associated with lackluster returns, also known as the "Summertime Blues". This year, we enter the summer months after what has been a strong, and rocky, start to the year. The market has rebounded spectacularly from the Q1 pullback and the S&P 500 (SPX) is up more than 10% for the year (through 6/3).
The table below shows the returns of both the Dow Jones Industrial Average (.DJIA) and the S&P 500 during the summer months (May 31st to August 31st) since 1981. The S&P 500 and the Dow Jones Industrial Average have each finished in negative territory in 16 of the past 45 summers (or about 36% of the time). Of those 16 down summers, there were 14 summers during which SPX and DJIA were both down at the same time. While less than half of the summers have been negative for these benchmarks, the bad summers were indeed bad, with some down double digits over the three-month period. For instance, in the summer of 1990, SPX fell -10.69%. In 1998, it saw a drop of -12.24%, but the worst summer came in 2002 during the tech crash when the index declined -14.16%. During the summer of 2008, which began a famously longer slide as SPX fell -8.39%. The market has bucked the trend recently, as the DJIA and the SPX have each had only one negative summer (2022) since 2015 and both indices have averaged gains of more than 7% over the last three summers.
Source: Nasdaq Dorsey Wright
To determine if there is one month that tends to have an outsized effect on summer returns, Nasdaq Dorsey Wright compiled a monthly summary of S&P 500 returns going back to 1958. What they found is that the summer months tend to have a lower median return than most of the other months of the year. It is the month of September that has historically provided the lowest median return at -0.42%, but it is followed by June which has a median return of just 0.16%. Notice too that the spread, i.e., the max return in each month versus the minimum return in a given month, is relatively low for the summer months (namely June and July). A closer look at the month of June reveals a max return of 6.89% in the last 60 years, which it posted in 2019, and which followed a May return of -6.58%. Every other month, except February, had a maximum return of more than 8%. Clearly, June has historically been one of the weaker months for SPX returns. However, we can't blame the Summertime Blues on June alone. August has experienced the second-largest drawdown (after October) at -14.56%, which compares unfavorably to the other months' largest drawdowns.
Source: Nasdaq Dorsey Wright
To take this concept one step further, Nasdaq Dorsey Wright looked at four hypothetical portfolios specific to each of the four seasons. Defined as follows:
Winter Portfolio Dates: 11/30 - 2/28
Spring Portfolio Dates: 2/28 - 5/31
Summer Portfolio Dates: 5/31 - 8/31
Fall Portfolio Dates: 8/31 – 11/30
The end result? The summer portfolio greatly underperformed the other three seasons - fall, winter, and spring. If you were to invest only during the spring months (March through May), the initial investment would have had a cumulative return of over 500% from 1958 through May 2026 with an average return of more than 7%, making it the best performing seasonal portfolio. The winter portfolio deserves an honorable mention because it produced a gain of over 350% during the study period. The point of the graph below is to show that the summer months paled in comparison to the others, gaining just 118% since 1958 - that results in an average return of only 1.7%.
Source: Nasdaq Dorsey Wright
As discussed above, summer has been much kinder to investors over the last 10 years or so, and you can see that the summer line on the seasonal growth chart above has turned upward. Still, over the very long-term, average returns have been noticeably higher during the other seasons. What summer has in store for the market this year remains to be seen. Last year, stocks recovered from a March/April swoon and the SPX went on to gain more than 9% during the summer. This year, we once again had a pullback in the spring months, but as we enter the summer months, the market has already exceeded its prior high by roughly 8% and is now pushing into extended territory.
The current reading for the PR4050 is: U.S. Equity Core = 98.59% & Money Market = 4.23%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing International Equities and Domestic Equities in the top two spots, while both maintain a commanding lead over Cash and Fixed Income.
Source: Nasdaq Dorsey Wright
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These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. All indices are unmanaged and may not be invested into directly.
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.
Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolios across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.
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The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
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