While expectations for summer often include a boost in mood from sporting events and holidays, this rarely translates into improved investor sentiment or stock market performance. This phenomenon is driven by psychological factors, as historical data shows that markets tend to underperform during the summer. For instance, the northern hemisphere, which accounts for 99% of the world's public companies by value, largely goes on holiday during these months.
Analyzing the MSCI World index over the past 30 years, the average long-run monthly return is 0.6%, leading to an annualized 7%. However, July and August combined have only delivered an average of 0.15% over the same period. This indicates a significant underperformance during the summer vacation season, contrary to what one might expect if markets were solely driven by 'animal spirits' as described by John Maynard Keynes.
Furthermore, summer months can be unexpectedly volatile. Of the 50 biggest daily falls in the MSCI World index since 1994, August accounted for seven, which is almost double what would be statistically expected. Despite this, implied volatility for US stocks, as measured by the Vix index, is actually lower in July and August compared to the monthly average, and bond volatility shows no difference. However, daily summer stock returns, while a quarter of those for the year, are heavily skewed; July's average monthly return is 1.2%, double the global index's, while August tends to be much weaker.
