How to Approach the Fourth Quarter after Its Strong Start


How to Approach the Fourth Quarter after Its Strong Start

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Dave Gilbert here, Editor of Smart Money.

‘Tis the season to be jolly…

I know. It’s only October, but it seems to get earlier every year. It won’t be long before stores start piping in holiday music to spark some good old-fashioned holiday spending.

But from the stock market’s perspective, it already is the season to be jolly. Seems like the market got the memo based on the big rally in the first two days of trading.

The fourth quarter is by far the best of the year for stocks. It is the only quarter in which all three months average positive returns, with the S&P 500 averaging a 4.2% gain over the last 72 years (according to the Stock Trader’s Almanac).

Even more encouraging, the fourth quarter strength usually carries over into January of the following year.

Of course, this year has been historically bad, so will these trends prevail? And what should investors do at this unusual time in market history?

This Could Be Bigger Than “The Big Short”

This is a financial event unlike anything we’ve seen in 14 years, and market analyst Luke Lango has the data to back that up. In fact, he just flew 2,600 miles across the country to release an emergency broadcast detailing everything you need to know.

And there’s a good chance this warning is going to fall on mostly deaf ears. But the folks who see past the headlines and listen to what Luke is saying could stand to win big.

Click here to watch Luke’s emergency briefing while there’s still time.

And if you miss out – don’t say we didn’t warn you.

Seasonal Trends Might Overpower Persistent Headwinds

Here’s some more good news: An awful first three quarters of the year tend to produce an end-of-year rally.

Ryan Detrick, Chief Market Strategist at @CarsonGroupLLC, recently tweeted that the only two times the S&P 500 had a worse first three quarters, it finished strong…

A screenshot of Ryan Detrick's 9/30/22 tweet

Adding to the historical impetus, 2022 is a midterm election year. That’s not so great leading up to the election, but stocks have a strong record of rallying post-election. Since 1946, stocks performed better in the six months following the election than the six months prior in 17 of the last 19 (90%) midterm years.

Bringing it all together, Ryan Detrick tweeted this chart that shows fourth-quarter strength (gold box) and midterm election year strength (black bars)…

An array of charts depicting the S&P 500 Index Average Monthly Returns (1950-2021)

Of course, we can all recite the disclaimer from memory: Past performance is no guarantee of future results. We all know that. And we all know that major headwinds and uncertainty continue to weigh on the market. But, in the famous quote often attributed to as Mark Twain, “History doesn’t repeat itself, but it often rhymes.”

Inflation, the Federal Reserve’s response, and Treasury yields will clearly continue to influence investors and stock prices. At the same time, those headwinds now meet stronger historical bullishness following the election and in the fourth quarter.

There will still be wild swings, but investors with a long-term perspective are taking advantage of bargains – some of which became even better bargains in the late-September swoon.

A Boom or a Bust?

As Eric Fry says, we know for certain that stocks are much cheaper now than they were last fall. The major averages are 18% (Dow) to 30% (Nasdaq) below their all-time highs, and many excellent stocks are down 50% or more.

Here’s Eric…

I also know that major averages like the tech-heavy Nasdaq Composite rarely fall as much as they have recently. But when they do, they usually offer outstanding investment opportunities…

It’s not to say that market is set to move higher. It could well stagnate or trade in a range for a time.

Investors can make money in that kind of market. Certain stocks and sectors are deeply discounted now, and we have seen buyers step in recently. As they should. Some quality companies are trading at bargain prices.

In addition, corporations and hedge funds are sitting on record levels of cash, so there is quite a bit of firepower out there.

A chart depicting how U.S. households have amassed record-high levels of cash in money-market funds and bank deposits

A lot of that cash is probably itching to get off the sidelines and into the game.

We are now in an environment where investors can put cash to work in expectation of solid and even large profits down the road.

You may invest in a stock that drops another 10%-20% in the current volatility, but it is unlikely you would be looking at the 50% or more shellacking that many stocks have gotten so far in 2022.

Most important of all, there is now a greater chance that any short-term losses will reverse and become 10%, 20%, 50%, or even bigger gains in the coming months and years – provided you’re investing in quality stocks.

If two big up days to start the quarter and positive historical trends seem inconsistent with how things feel, you’re right. The latest American Association of Individual Investors’ Sentiment Survey showed that more than 60% of investors were bearish – meaning they expect prices will fall over the next six months. The prior week also registered more than 60% bearish, the only time in the survey’s history readings have been that negative in consecutive weeks.

Sentiment can’t and won’t stay that negative. It will at some point revert to historical trendlines. As AAII itself says, “Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.”

There are a lot of good reasons to think it is the season to be jolly, at least jollier than we have been so far in 2022. Whether we get a booming fourth quarter or more curveballs, there are quality, long-term bargains out there.

Eric Fry just recommended that his Investment Report readers sell a couple of hedges against rising interest rates that collectively averaged an 11.6% gain when the S&P 500 was posting 22% losses. He is actively looking to put some of that money back to work in the kinds of bargains we’ve talked about, confident in the long-term upside potential in quality stocks operating in massive megatrends.

If you would like to see Eric’s latest portfolio, you can click here to learn more about joining Investment Report today.



P.S. If you act now, you can also gain access to Eric’s 25 stocks to sell TODAY. Details here.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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