I’ve never had the benefit of a wise, older mentor to shepherd me through my career. During my formative years as a daily newspaper reporter, whenever I asked for help, the attitude of my supervisors was: “Look, kid, just figure it out. And don’t screw up.”

As a journalist, I was raised by wolves. Which gives me insights into the wolves of Wall Street. Forget the soothing sermons of avuncular gurus. The stock market rewards unsentimental ruthlessness. Want a friend? Get a dog.

Most investors underestimate the enormous degree to which the stock market is driven by algorithms. The “algos” will become even more powerful, amid the rise of artificial intelligence (AI).

Prices move in trends and countertrends, and price action is repetitive, with certain patterns reoccurring. Accordingly, the following indicators suggest that the stock market slump of autumn has reached a bottom, and the fourth quarter could witness a powerful rally.

The CBOE Volatility Index (VIX), aka fear index, has been in a steep decline, falling to below 15 after reaching a recent high of 21. A VIX reading below 20 suggests a low-risk environment; a reading above 20 is indicative of higher stress, fear, and volatility.

At the same time, the benchmark 10-year U.S. Treasury yield has fallen from the 5% high it hit last month (see chart).

The decline in the 10-year Treasury yield suggests that investors are revising down their expectations for inflation. Economic growth remains on track but it’s decelerating, which dampens inflation and in turn motivates central banks to ease up on tightening.

After a nice rally this week, the S&P 500 is back above its 200-day moving average, which denotes upward momentum.

Seasonality is in our favor as well. Consumer spending tends to increase during the fourth quarter, especially in the lead-up to Christmas. This boost in consumer activity benefits companies’ revenues, which in turn can boost stock prices.

The fourth quarter, being the final quarter of the year, is when many businesses aim to meet or exceed their annual financial goals. Positive earnings reports enhance optimism among investors and drive stocks higher. Tax-loss harvesting and institutional “window dressing” also tend to lift stocks in the fourth quarter.

WATCH THIS VIDEO: Stock Market Outlook 2024: The Perils and Profits Ahead

For third quarter 2023, the blended year-over-year earnings growth rate for the S&P 500 is 2.7%, according to the latest data from research firm FactSet. On September 30, projections called for a decline of -0.3%.

If 2.7% turns out to be the actual growth rate for Q3, it will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022.

For Q3, with 49% of S&P 500 companies reporting actual results, 78% of S&P 500 companies have reported a positive earnings surprise and 62% have reported a positive revenue surprise. This favorable trend has been particularly noticeable in the sectors of technology, health care, and consumer discretionary.

Technology companies have continued to thrive as certain megatrends (e.g., AI and remote work) gain traction. Meanwhile, cyclical sectors such as energy and financials have benefited from improving economic conditions.

The solid Q3 earnings performance so far of the S&P 500 reflects the broader economic recovery. For Q4 2023, analysts are projecting year-over-year earnings growth of 5.3% and revenue growth of 3.8%.

Consumer spending, business investment, and global trade are all contributing to economic growth, in defiance of the wars in the Middle East and Eastern Europe.

On Friday, the Bureau of Labor Statistics reported that the U.S. economy added 150,000 jobs last month, slightly below what economists had forecast. The unemployment rate ticked up to 3.9%. A cooling but still strong labor market is generally what the Fed wants to see.

The main U.S. stock market indices closed sharply higher on Friday, as follows:

• DJIA: +0.66%
• S&P 500: +0.94%
• NASDAQ: +1.38%
• Russell 2000: +2.71%

Stocks capped their best week so far all year. The 10-year Treasury yield dipped to 4.57%.

In what could be an inflection point, optimism is returning to Wall Street and corporate C-suites. All the more jarring, then, that most Americans perceive the economy to be in dismal shape. This disconnect is partly the fault of unwarranted negativity in the news media, but also because consumers are more affected by anecdotal evidence than broad statistical abstractions.

Government data in the aggregate may show ebbing inflation, but it doesn’t feel that way for shoppers who still pay high prices for certain items such as gasoline and eggs.

Preparing for the pivot…

As I’ve noted above, a major pillar of the bull case is the approaching end of Fed tightening. We’ve probably reached peak interest rates. According to this Friday’s reading of the CME FedWatch tool, 90.2% of investors are betting that the Fed will keep rates the same at its next meeting in December.

Which brings me to the utilities sector.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

As you position your portfolio for next year, turn to utilities stocks. Utilities stocks offer growth, income and asset protection. That’s an unbeatable combination.

The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

But you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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