Market Forecast: Cloudy
Don't count on the "summer rally" to happen this year.
Before I ever put a penny in the stock market, I spent years reading every book and article on investing I could find.
I didn't plan it that way, but I first got interested in the market at the age of 12 when I had no money beyond my $4 a week allowance and whatever little I could earn from delivering newspapers and shoveling snow.
So I spent about 5 years playing the market on paper. I would carefully select stocks that I thought had the potential to move up and then follow them to see how I would have done if I had invested "real" money.
My father thought this was hilarious. He would constantly tell me that as long as I was only investing "mentally," all I could lose was my mind.
My high school graduation gifts provided me with enough cash to actually purchase a stock. It was June and, as I knew from my extensive reading, just about time for the traditional summer rally to begin.
In my innocence, I assumed that a company that had a connection with summer would do well in a summer rally, so I purchased 100 shares of a New Jersey-based air conditioner company named Fedders and made a couple of hundred dollars from the investment.
That was my first experience with the summer rally, and it was certainly a lucky one.
Why summertime is rally time
In this article, I'll explain why the stock market has a history of rallying in the summer and why the summer rally may not occur this year.
The best explanation I've heard for the summer rally -- which normally begins in mid-June and ends just after Labor Day -- is that a flood of new pension fund money comes into the hands of investment managers around July 1. According to this theory, stocks start to rally in June in anticipation of this money being put to work in the market.
Increased liquidity is the fuel for higher stock prices, so I believe that the large infusion of new money can help drive the market up.
But, like everything else associated with the stock market, there's no guarantee that a summer rally will occur every year. Caution is especially appropriate this year, as corporations continue to warn of poor earnings ahead and as gasoline prices rise.
Negative news prevails
Despite the repeated lowering of interest rates by the Federal Reserve Board in the first half of this year and the growing prospect of generous tax cuts, the economy is sputtering along. Companies, particularly those involved in technology areas, are continuing to lay off thousands of workers. The downturn has spread to media companies, which are feeling the effects of cutbacks in advertising expenditures.
Retailers are also feeling the pinch as the so-called "wealth effect," generated by the booming stock market of the 1990s, has evaporated. The economic statistics may say that the country isn't in a recession, but the confidence that many wage earners felt over the past few years has now largely been replaced by fear.
Until there's evidence of a real turnaround in the overall economy, it will be difficult for the stock market to mount a truly sustainable rally. The news background is just too negative these days to allow anything more than brief upward spurts by stocks, such as we experienced in April and early May.
It's possible that 2001 will go down in market history as the year the summer rally never arrived.
Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm. He's also an associate editor for Ophthalmology Management.
Optometric Management, Issue: June 2001