Cool It If You Want the Market to Catch Fire

Summer is here, and that means stock market investors had better beware.

Despite the season’s reputation for producing rallies, the evidence suggests otherwise. In fact, the hottest months of the year are sometimes a cool stretch for shareholders in individual companies or equity mutual funds.

Most investment advisers don’t recommend that clients buy or sell primarily on the basis of seasonal variations, but such trends can provide insight on the market’s direction. Even skeptics have to admit that a knowledge of seasonal fluctuations can prove useful at cocktail parties.

Yale Hirsch, an investment adviser in Old Tappan, N.J., and author of the “1994 Stock Trader’s Almanac” (Hirsch Organization, $31, postage paid), says summer rallies are, in fact, less productive than those in spring, fall or winter. June and August are sub-par months and July is nothing special, his research indicates.

Hirsch attributes some of the lackluster summer results to the fact that people are on vacation and not paying as much attention to their portfolios.

But more important than summer per se is the market’s performance during the six months from May through October, says Hirsch. From 1950 through 1993, he found that the Dow Jones industrial average climbed a total of just 39 points during those months, compared to a gain of 3,443 points from November through April.

The Value Line Mutual Fund Advisor has also studied seasonal fluctuations in the market. The New York publication found summer to be an unexciting period for stock funds, though not as bad as autumn.

Value Line looked at the performance of eight fund categories from 1972 through 1993. The stock fund groups rose less than 2.5% on average from June through August. Returns were closer to 6% during winter (December through February) and 4% in spring (March through May), but less than 1% in the fall (September through November).

For bond funds, the seasonal variations were much less pronounced, with autumn actually emerging as the best period for the more conservative fixed-income categories.

Other seasonal variations might also be worth heeding. For example, market observers have noticed a tendency for small stocks to rally during the last few days of December and in early January--the so-called January effect.

This phenomenon seems to be explained by taxes, in that investors with paper losses have an incentive to sell their positions late in the year to realize deductible losses. The January effect has been most evident on thinly traded stocks, over which individuals rather than institutional investors exert more influence.

Of more midyear relevance, research from the Morgan Stanley brokerage in New York suggests that cyclical stocks slightly outperform their growth rivals during the first half of the year. That’s followed by better results for growth stocks from July through December.

The rationale is that economists are more optimistic about the nation’s economic prospects early in the year, so analysts and investors react by favoring cyclical companies at that time, says C. Beth Cotner, a portfolio manager with the Kemper mutual fund group in Chicago who attaches some credence to the idea.

Cotner also follows one of the more famous calendar indicators, the presidential election cycle. The idea here is that Presidents and their Administrations tend to tackle the tough economic problems during the first two years after an election so the economy will be showing improvement leading up to the next vote.

According to numbers crunched by Hirsch, the market has enjoyed a cumulative 441% gain during election and pre-election years dating from 1904 through 1993, compared to a 137% increase during the first two years of presidential terms over this stretch. Hirsch’s figures exclude the impact of reinvested dividends, which he says would magnify the results.

As expected under the presidential cycle, stocks and stock funds are faring poorly thus far in 1994, though the indicator didn’t exert much of a negative impact in 1993.

That’s the rub with seasonal trends and other stock market indicators: They may work frequently or even most of the time, but they’re never 100% reliable.

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Do concentrated mutual funds--those that own just a few dozen stocks--perform better or worse than more diversified rivals that might have hundreds of investment positions? Morningstar Inc. of Chicago studied the issue and found little evidence either way.

The more concentrated funds do tend to have higher expenses and are a bit riskier, but they don’t perform significantly better or worse than their more diversified brethren, Morningstar reported.

It’s Often a Seasonal Market

Despite the stock market’s reputation for staging summer rallies, the June-August period isn’t the most profitable one for investors. Stock mutual funds tend to perform better in winter and spring, while conservative bond funds do best in the fall.

Those observations are based on an analysis of fund returns from 1972 through 1993 by the Value Line Mutual Fund Advisor in New York. Here’s how selected mutual fund categories have fared on a seasonal basis:

Small-Company Stock Funds

Winter: +7.3%

Spring: +4.6%

Summer: +2.0%

Fall: +0.5%

Aggressive-Growth Stock Funds

Winter: +6.1%

Spring: +4.6%

Summer: +2.6%

Fall: +0.8%

Growth Stock Funds

Winter: +5.3%

Spring: +3.6%

Summer: +2.5%

Fall: +0.8%

Foreign Stock Funds

Winter: +5.9%

Spring: +3.6%

Summer: +2.1%

Fall: +0.5%

Income Funds

Winter: +4.8%

Spring: +3.0%

Summer: +2.5%

Fall: +1.6%

High-Yield Bond Funds

Winter: +3.4%

Spring: +2.3%

Summer: +1.9%

Fall: +1.7%

General Bond Funds

Winter: +1.9%

Spring: +1.8%

Summer: +1.9%

Fall: +3.0%

Government Bond Funds

Winter: +2.1%

Spring: +1.6%

Summer: +1.6%

Fall: +2.4%

Seasons are defined as follows: winter (December, January, February), spring (March, April, May), summer (June, July, August), fall (September, October, November).

Source: Value Line Mutual Fund Advisor, New York.