Investing / The Compound Effect

The dog days of summer, and why this one may run long

2026-07-24 | 5 min | By Heath J. Harris

July usually treats stocks well and August drags. This year oil and war are rewriting the seasonal script, and we think the fog lingers into midterm season.

July usually rewards patient investors and August usually tests them. Over the last 20 years the S&P 500 has finished July higher about 75% of the time with an average gain near 2.4% (Benzinga), while August has averaged close to flat and turned negative more often in years after a presidential election (Verdence). That is the traditional script, and this summer is not reading from it.

Copper, chips, and vacation calendars usually set the mood in July. This year it is a tanker lane. A naval blockade on Iranian ships spiked oil, and the ripple hit equities directly. On the Thursday CNBC covered, the Dow shed 506 points and the S&P 500 dropped 1.21% as oil surged on the Middle East (CNBC, July 23, 2026). That is not a sleepy summer tape.

What the seasonal record actually says

Strip out this year for a moment and the pattern is real. July has been one of the friendliest months on the calendar. StoneX puts the average July price return for the S&P 500 at about 1.4%, and Trade That Swing notes July closes higher than it opened roughly 80% to 85% of the time on both the S&P 500 and the Nasdaq 100. Different data sets, same direction. July tends to be green.

August is where the mood shifts. Verdence found the average August return sitting right around negative 0.01%, higher only about 55% of the time. Benzinga's 20 year read has August up in 12 of 20 years, a 60% hit rate, with an average gain of just 0.1%. Barely positive on the best measure, slightly negative on others. That is the definition of a coin flip with no payoff.

Why the summer sag? The plain answer is people leave. Trading volumes thin out as investors take vacation and desks run light (Morpher). Fewer participants means less conviction, and a market with less conviction drifts and overreacts to whatever headline shows up. In a normal year the headlines are quiet, so the drift wins. This year the headlines are anything but.

The sell in May myth

Every summer someone dusts off sell in May and go away. The idea comes from the observation that returns tend to be weaker from May through October (Moomoo). And there is a kernel of truth. The Corporate Finance Institute pegs the November to April stretch at a cumulative average of about 6.7% versus roughly 2% for the summer half.

But a rule that only tells you when to sell and never tells you when to come back is not a plan. As Barchart jokes, the saying "just trails off, distracted by a butterfly." American Century and Fidelity have both looked at this and reached the same verdict. Sell in May is a myth in practice, because staying invested has generally beaten selling and sitting on the sidelines. The seasonal skew is a tendency, not a trade. Think of it as a tool, not a crystal ball (Trade That Swing).

We agree. We are not moving clients to cash because the calendar flipped to summer, a case we made in Your Wealth Strategy Cannot Take a Summer Off. We never have.

Why this summer is different

Here is what has our attention. The stress this year is not in equity volatility, it is in oil. Saxo Bank flagged oil volatility, the OVX, at 62 while the VIX held around 18. Oil vol running roughly three times equity vol tells you the market's fear is concentrated in one place. When crude jumps, stocks follow, and when it cools, tech rebounds. That is a market being led around by a commodity, not by earnings or the Fed.

The forecasts are all over the map, which is its own signal. J.P. Morgan sees Brent averaging around $86 in the third quarter before easing toward $78 later. Goldman, at least in one read, held far lower 2026 averages near the mid $50s on expectations of swelling supply. When two of the biggest research shops are that far apart on the single variable driving your market, you should expect the swings to continue.

Layer on the AI wobble. There has been a rotation out of technology and momentum and into value and defensive names as an AI selloff shook the leaders (Interactive Crypto). So you have two crosscurrents at once. A geopolitical oil shock and a leadership rotation. Neither respects the vacation calendar.

Why we think summer runs long this year

Midterm years tend to be awful in general. Ameriprise, using data back to 1946, found the seasonal weakness runs deeper in midterm years (Barchart). And Verdence's work shows August and September already skew worse in the year following a presidential election. That is exactly where we sit.

The 2026 midterms land on November 3, with control of the House and Senate up for grabs (Britannica). Markets hate uncertainty, and until there is a general consensus about which way that vote breaks, we think the usual summer soft patch stretches later than the textbook suggests. The normal August drift plus an oil shock plus a leadership rotation plus a contested midterm is a recipe for a longer fog, not a shorter one.

So what do we do with all of it? Nothing dramatic. We do not sell the summer. We do not chase the oil headline. We keep clients diversified across the very sectors that are rotating, because we cannot know in July which one leads out of November. Seasonality shows historical tendencies, not what will happen this year, and past performance is not necessarily indicative of future results (StoneX).

If you want help running this for your own plan, our team at Compound Advisory does this work every week.

Ready for a clearer retirement strategy? Schedule your complimentary Retirement Clarity Assessment at https://compoundadvisory.co/retirement-clarity-assessment.

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