Summer Swoon or Summer of Love for Stocks?

Market data suggest that investors should watch out for a summer swoon. But a top market strategist says not so, it’s Haight-Ashbury hippie time for the markets, which he says are now in a 1967 redux.

The last three summers, the Dow dipped on average 9.6%. Since 1993, the Dow Jones Industrial Average has suffered a tiny average loss of less than 1% in August, ending the month up higher six out of ten times, says Bespoke Investment Group.  Four out of ten chance there, with September posting a worse track record, Bespoke says. It is the only month in which the Dow has suffered a loss on average over the past 20, 50 and 100 years.

But maybe the June swoon could have been the summer’s only fainting spell, dropping 750 points, or nearly 5%.

“It has been a summer of love for the stock market,” says Jeffrey Kleintop, chief market strategist at LPL Financial. “As the temperatures heated up, so did the stock market. From June 24 to August 2, 2013, the S&P 500 Index rose 9%, pushing stocks up about 20% for the year. The last time we saw stocks perform the way they have this year in both pattern and magnitude was 1967.”

Here are Kleintop’s eight similarities between now and 1967:

• Bond yields rose over the course of 1967, but most notably from April to August when the 10-year Treasury note rose about one percentage point—similar to this year’s move over the same time period.
• Gross domestic product (GDP) averaged a lackluster 2% in the first half of 1967, not too far from the 1.4% growth seen in 2013’s first half.
• Earnings per share growth for S&P 500 companies was pretty flat on a year-over-year basis then and now.
• Protest politics took place around the world in 1967; this year, Egypt and Brazil are two of the hot spots for protest-driven societal change.
• Recent events still bring forth faint echoes of the race and gender equality struggles of 1967.
• Detroit’s bankruptcy was almost 46 years to the day that the Detroit riots of 1967 broke out and are considered to be the seminal event that started the erosion of the tax base that left the city to declare bankruptcy in 2013.
• President Obama’s Affordable Care Act and other programs have drawn comparisons to President Johnson’s Great Society programs passed in the mid-1960s, which included Medicare, the extension of welfare, and environmental activism, and were seen as part of a host of large government spending programs that would speed economic growth as they came into effect in 1967 and beyond.
• The National Security Agency’s (NSA) Project MINARET began in 1967, intercepting electronic communications of U.S. citizens without warrants or judicial oversight. This controversial program can be compared with the revelations in 2013 regarding NSA spying on U.S. citizens.

Kleintop offers a caveat, though: “Of course, there are lots of differences between now and 46 years ago, and there is no assurance that stocks will continue to follow the 1967 pattern.”

But he adds: “Nevertheless, if the pattern in the stock market mirroring 1967 that has unfolded so far this year holds in the second half, we may see a volatile market with a slower pace of gains—but more record highs ahead. That historical flashback happens to be consistent with our market forecast for the second half of the year.”