After a challenging third quarter, many investors are looking ahead to a more favorable year-end. In this blog, we’ll look into the data that suggest the possibility of a year-end rally.

Oversold Conditions in US Stocks
If we look at the current state of the stock market, it’s displaying signs of being oversold. Historically, such conditions have often signaled the approach of market lows, rather than further declines.

For instance, last week just 10% of the components in the S&P 500 were trading above their 50-day moving averages. This signal didn’t work well before the 2007/2008 crisis or COVID-19, but it has been reliable in most other cases when nearing a market low. Since we don’t believe that the current situation resembles another generational crisis or a once-in-a-century pandemic, it’s possible that we are close to a market low.

Previous Periods Of Oversold Conditions

Market Rebound Following a Weak September
Investors have historically faced disappointment in September, which has been the worst month for returns dating back to 1928.

The good news is, when September has seen declines of 3.5% or more, there has been a strong fourth quarter rally. Stocks have never been lower in the fourth quarter, with the average return of 9.0%.

weak september

Historically Strong Fourth Quarter Performance
The fourth quarter has traditionally been a strong period for the stock market, and the numbers show it’s outperformed by a wide margin.

On average, the S&P 500 has gained 4.2% during this quarter, which outpaces the average 0.6% gain in the third quarter. What’s more, the index has ended up higher almost 80% of the time during the fourth quarter.

4th quarter performance

Spooky Month for Bear Markets
The month of October has a spooky reputation in the world of finance, and it’s not because of Halloween. It’s because October has had some of the scariest market crashes – including the 1987 “Black Monday”. 

Despite its volatile history, October has historically marked the end of more bear markets than the beginning. When we take a look at the average path of the S&P 500 over a calendar year, you will see it tends to bottom in October before trending higher to end the year.

The McRib Effect
While I wouldn’t take this chart seriously, there is a surprising correlation here. Turns out stocks do much better when the McRib is being sold. Now that they’ve brought it back (even after saying it was gone forever), it could be another reason for a year end rally. Credit to Nick Maggiulli for this analysis:

Bottom Line
As always, there will be plenty of reasons to worry in the stock market. Some of the recent concerns could have led to normal seasonal weakness and could position us for a fourth quarter rally. As we approach the year-end, the data presents a completing argument for optimism in the stock market.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimers / Sources:

Period of oversold conditions from George Maroudas. Data from YCharts.

Fourth Quarter Returns Following a down September from George Maroudas. Data from YCharts.

Fourth Quarter has historically been the best quarter of the year from LPL Financial.

If History Repeats this is one of the best times to go long from LPL Financial

The McRib Effect from Nick Maggiulli

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.