Is a Stock Market Rebound in the Cards for Q4?

Stock market investors are bidding good riddance to September. The third quarter was disappointing as well. However, the fourth quarter is likely to be considerably better.

History shows that weak third quarters are typically followed by robust fourth quarters. First, let’s parse the dismal numbers for September and Q3.

The Dow Jones Industrial Average fell 3.5% in September and 2.6% for the third quarter. The S&P 500 finished the month down 4.9% and Q3 lower by 3.7%.

The tech-heavy NASDAQ fell 5.8% in September and was down 4.1% for Q3. Both indices posted their worst months so far for 2023.

The leading sector in Q3 was energy (+12.2%), which was driven higher by the resurgence of crude oil prices. The worst Q3 performer was utilities (-9.2%), due to inflation and climbing bond rates. Higher rates make income assets that are alternatives to utilities stocks more attractive.

I’ve seen that movie, too…

We got good news over the weekend. Congress narrowly averted a government shutdown Saturday with just three hours to spare. The House, in a remarkable turnabout, passed a stopgap measure to keep the federal government open into mid-November and the Senate then cleared it and sent it to the White House for President Biden’s signature.

We’ve already seen this movie before, so perhaps it shouldn’t come as a surprise that the budget battle was a nail-biter with a happy ending. Congress went through similar brinkmanship in 2011 and earlier this year. Regardless, House Speaker Kevin McCarthy (R-CA) may not keep his job much longer, after caving to the Democrats. The far-right knives in the House GOP are out for him.

But the upshot is, the avoidance of a destructive government shutdown removes a major risk that had been weighing on stocks. Sometimes, politics does matter to Wall Street, at least over the short term.

Last week, stocks generally slumped, as Congress fought hammer-and-tong over the budget and the benchmark 10-year U.S. Treasury yield (TNX) surged past its multiyear resistance level of 4.50%. The following table tells the story:

I’ve long argued that the Fed would err on the side of hawkishness in its fight against inflation. The Fed’s recent warning that the fed funds rate may stay higher for longer shouldn’t come as a surprise. That said, despite Fed Chair Jerome Powell’s tough talk, we’re seeing the light at the end of the tightening tunnel.

WATCH THIS VIDEO: Assessing The Latest Risks to The Rally

The main U.S. stock market indices closed mixed on Monday, as follows:

  • DJIA: -0.22%
  • S&P 500: +0.01%
  • NASDAQ: +0.67%
  • Russell 2000: -1.58%

West Texas Intermediate, the U.S. crude oil benchmark, slipped 2.21% to settle at $88.78 per barrel.

We just got through a tough September, which historically is the weakest month of the year for stocks. The main culprit has been rising Treasury yields. However, as inflation continues to cool and economic growth decelerates, we could be on the cusp of a fourth quarter rebound.

Since 1990, in the 11 years when stocks declined in the third quarter, the S&P 500 rebounded with a gain in the subsequent fourth quarter nine times, averaging a return of 10.6% in the final three months of the year.

Small-cap stocks performed even better in those 11 years, averaging an 11.4% gain for Q4. Small caps tend to do well during economic expansions, so when they outperform, it’s a bullish sign.

About 80% of small-cap sales come from within the U.S., which helps insulate small-valuation stocks against overseas turmoil such as the Russia-Ukraine war or U.S.-Chinese tensions.

Despite the bearish outlook of the average investor right now, the market is about to enter its seasonally favorable period, which is presaged by the so-called Halloween Indicator. This indicator is the converse of “Sell in May and go away,” which is the seasonal pattern with which most investors are likely already familiar. The market tends to rise during the period from November through April.

However, if you’re still unnerved by market uncertainty, consider the advice of my colleague, Jim Pearce.

Jim Pearce is the chief investment strategist of our flagship publication, Personal Finance. Jim has unearthed a once “secret” income power play that’s giving everyday investors the opportunity to collect huge payouts, regardless of Fed policy or the ups and downs of the markets. To claim your share, click here.

John Persinos is the editorial director of Investing Daily.

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