The Case for a Good 4th Quarter in the Market

Final period is the strongest, especially when the S&P 500 is up over 15% for the year, LPL’s Detrick says.

No one can accuse the fourth quarter of getting off to a roaring start in the stock market: Down the first two days by 3%, then up only slightly at 0.8% on Thursday. And the expectation is for a punk jobs report Friday, which could make for a lousy close to the week.

Maybe this fourth quarter might surprise us, surmises Ryan Detrick, senior market strategist for LPL Financial. “Yes, this has been a historically bad start to the fourth quarter,” Detrick wrote in a research note, adding that history favors a brighter tomorrow.

When the S&P 500 has been up more than 15% for the year “heading into the usually bullish fourth quarter, the returns actually became stronger” as the quarter progressed, he said.

Detrick said that since World War II, this phenomenon has occurred 17 times, with stocks up an average 4.6% for the period. As September closed, the index was up about 18% for 2019. At the Thursday close, three days into the new quarter, it was up 15.9%, according to Morningstar.

Since World War II, the fourth quarter was negative two years in a row only twice—the first during the 2008 financial crisis, the second amid the ruinous stagflation of the late 1970s. Detrick emphasized  that since 1950 the S&P 500 rose 3.9% on average for the quarter, and has closed higher 78.3% of the time.

September finished in the black this year, although its advance wilted at the end amid a bad news torrent. So maybe, Detrick said, “it was simply ‘time’ for some seasonal volatility.” The S&P 500’s 14% decrease in last year’s fourth quarter “was unusual, but it could point to a better end to 2019,” he said..  

Lately, what Wall Street calls headline risk has been running rampant. We have the trade war raging, not to mention the House of Representatives’ impeachment inquiry, Hong Kong protests, and ebbing US manufacturing data.

Given the spate of downbeat news developments recently, the reason given for Thursday’s upswing is interesting: That a December interest rate cut from the Federal Reserve is now more likely.

“This downturn is starting to spread and that means the tea leaf readers at the Fed are going to be teeing up a third rate cut this year,” Chris Rupkey, chief financial economist at MUFG Union Bank, told Bloomberg News. “Policymakers are going to need a bigger gun to stop this avalanche of bad news from dragging down business and consumer confidence even further. Rate cuts are coming. Lots of them. Bet on it.”

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