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And they're off

Are you positioned with the Jockey or the Horse?

Racing to the Finish Line

Summer is over and the fall weather is in full swing. Halloween marks the end of the third quarter and reminds us this time of year typically goes by even faster. With the year-to-date performance and all the variables the market is throwing at us right now, it's understandable for one to wonder where they can find the best place for a decent return. The stock market has historically performed well in the fourth quarter of the president's third year in office. In fact, since World War II, the S&P 500 has returned an average of 6.8% in the fourth quarter of the president's third year, compared to an average return of 4.5% for the entire year.

There are a few reasons why the stock market tends to perform well in the fourth quarter of the president's third year. First, the economy is typically in a good state of health at this point in the presidential cycle. The president has had two years to implement his policies, and the economy has had time to respond. Although those are historical references and generalizations, I'm not sure I could find many Americans who would agree that the economy is in any kind of good state right now. We'll take this point with a grain of salt.

Second, the Federal Reserve is typically in a dovish stance during the fourth quarter of the president's third year. This means that the Fed is more likely to keep interest rates low, which is good for stocks. Again, this is NOT just another day at the office. Things are pretty messy right now. For years the economy and market surged and the reserve didn't find economic data to convince them that they needed to raise rates. Failure to do this left them with their pants down as the economy started to heat up. The Fed Chair Jay Powell has been anything but secretive about where his target for inflation is as well as the duration he needs to keep rates elevated. It may be common for the economy to be in good condition and allow a dovish tone from the Fed during normal times, but again, we're far from that now.

Third, the fourth quarter is typically a strong quarter for corporate earnings. This is because companies are preparing for the holiday season and are typically seeing strong sales growth. To put things into perspective, last year was not a good year for the stock market or corporate earnings as a whole. Coming off of lower expectations, many companies have been meeting and beating expectations throughout the year. This is the only point that seems to be maintaining a level of consistency with the data we've seen in the past. With that in mind, let's take a deeper dive into sector performance so far.

Here is a more detailed breakdown of Q3 earnings performance by sector:

  • Energy: +21.4%

  • Financials: +8.2%

  • Materials: +7.8%

  • Information Technology: +6.4%

  • Communication Services: +5.3%

  • Industrials: +4.8%

  • Consumer Discretionary: +3.1%

  • Healthcare: +2.9%

  • Utilities: +2.6%

  • Real Estate: +2.5%

Overall, Q3 earnings have been better than expected so far. However, it is important to note that the earnings season is not over yet, and there is still some uncertainty about how the remaining companies will perform.

Of course, there is no guarantee that the stock market will always perform well in the fourth quarter of the president's third year. There are a number of factors that can affect the market, including economic conditions, political events, and interest rates. We are currently faced with two ongoing wars as well as elevated interest rates and a federal reserve that tells us point blank that they will need to keep rates higher for longer.

Here are some specific examples of how the stock market has performed in the fourth quarter of the president's third year:

  • In 1985, the S&P 500 returned 13.4% in the fourth quarter of President Reagan's third year.

  • In 1997, the S&P 500 returned 17.2% in the fourth quarter of President Clinton's third year.

  • In 2007, the S&P 500 returned 10.8% in the fourth quarter of President Bush's third year.

  • In 2015, the S&P 500 returned 7.3% in the fourth quarter of President Obama's third year.

As you can see, the stock market has consistently performed well in the fourth quarter of the president's third year. This is a good trend for investors to keep in mind when making investment decisions.

What to Expect in the Fourth Quarter of 2023

Based on historical precedent, investors might expect the stock market to perform well in the fourth quarter of 2023. I can't necessarily reach that conclusion in our current economic and political state. The economy is expected to be in a good health at this point in the presidential cycle, and one could only hope the Federal Reserve is going to lighten up on the rate hikes, but those scenarios seem less likely.

We cannot forget the impact of the war that's still going on in Ukraine. The war has caused energy prices to soar, which is putting pressure on corporate profits and consumer spending. Additionally, the war has raised the risk of a global recession.

The Federal Reserve's current policy remains hawkish. They have vocalized a commitment to keep inflation at bay. While this is good for inflation, it could also lead to a slowdown in economic growth. Many of our clients haven't faced a rising rate environment like this ever in their lifetime.

We can't rule out a recession just yet, but the real recessions typically show up undetected. Sure, short term rates look enticing in the 5 - 6% range, but long term investors may not be nimble enough or time the market correctly. For that reason, it may not be wise to jump in and out of investments like this. It always makes sense to discuss things with your advisor to update your plan and incorporate any potential changes you're considering.

Things to think about

Here are a few considerations for investors who want to take advantage of the potential gains in the fourth quarter of 2023:

  • Consider remaining invested in the stock market. The stock market has historically performed well in the fourth quarter of the president's third year.

  • Diversify your portfolio. This means investing in a variety of different stocks and asset classes. This will help to reduce your risk if one particular sector or industry underperforms.

  • Rebalance your portfolio regularly. This means selling some of your winners and buying more of your losers. This will help to keep your portfolio aligned with your risk tolerance and investment goals.

  • Don't panic sell. If the market takes a downturn, don't panic sell your stocks. Instead, stay calm and focus on your long-term investment goals.

The fourth quarter of the president's third year can be a great time to invest in the stock market. By following these tips, investors can increase their chances of success.

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