Fourth Quarter Fun…or Folly?

Key Points
  • The resiliency of stocks continues but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties.

  • U.S. economic data will likely be skewed by the hurricanes’ impact but the underlying trend should remain positive. Earnings reporting season will begin with elevated expectations, so the ability to hurdle the bar is getting tougher, but if surprises are biased to the upside, stocks should perform well.

  • Non-U.S. stocks are about to hit multiple milestones, which typically shouldn’t concern investors as underlying fundamentals continue to appear solid.

Heading into the home stretch

As we wind down the third quarter it’s time to look ahead. Typically, the fourth quarter sees quite a bit of action, with budget battles—both political and corporate—hiring and firing announcements for the next fiscal year, money manager positioning for year-end, and the all-important holiday shopping season all gracing the calendar. There are also the seasonals to consider. Since 1952, October has been the second-worst performing month of the year, while November and December have been the 3rd and 2nd best performing months, respectively. That said, September—historically the worst month of the year—brought little in the way of weakness; which historically bodes fairly well for the remainder of the year. But the upcoming 30th anniversary of the Crash of ’87 will remind folks of some nasty October swoons; while we’re entering the month with fairly optimistic conditions, a contrarian indicator typically. (For more on sentiment read Liz Ann’s Comfortably Numb? article.) This year so far has been marked by historically low volatility and there doesn’t appear to be an imminent catalyst for a surge—barring perhaps a military escalation of the war of words between President Trump and North Korea’s Kim Jong Un. In the meantime, so far this year we have only seen 5% of trading days with a move in the S&P 500 of greater than +/- 1%; by far the lowest level since 1982, when intra-day data began to be recorded. In addition, for the first time in a dozen years, there have been no +/- 2% days this year; while the maximum drawdown has been the shallowest in the history of the S&P 500. But the year’s not over, needless to say.

It’s been a pretty smooth ride—so far

S&P 500 YTD

Source: FactSet, Standard & Poor's. As of Sept. 25, 2017. Past performance is no guarantee of future results.