After three winning quarters for the market, what will the fourth bring?
If history repeats, stocks could be in for a sweet end to the year. In the last seven years in which the rose in each of the first three quarters, only in one of them — 2007 — did the index drop in the fourth.
Actually, when one looks at the entire performance history of the S&P 500 going back to 1928 (which is available despite the fact that the index was technically created in 1957) one finds that out of the 19 years in which the market rose in the first, second and third quarters, a negative fourth quarter only followed five times. In these 19 years, the S&P's median performance was a 4.1 percent gain, according to a CNBC analysis of FactSet data.
That 74 percent "win rate" and impressive median gain for fourth quarters following three consecutive winning quarters compares to a 62 percent win rate for the S&P over all of its 355 quarters, and average quarterly performance of a 2.5 percent gain. However, it is also the case that the fourth quarter just happens to be better for investors in general; the market rose in 73 percent of fourth quarters, and actually turned out a better median performance of a 4.5 percent gain.
The recent rises seen in fourth quarters can thus be ascribed to market seasonality — or, perhaps more credibly, to mere randomness.
But for the bullish strategist Tom Lee of Fundstrat, who has pointed to similar figures in the past, something more is at work. Lee argues that in years when stocks are doing well, active managers will invest heavily in an attempt to avoid lagging the market too badly — creating an additional bullish force in the market. The fact that 2016 has been a good year so far is therefore a reason to bet that stocks will rise, he concludes.
90% chance stocks see a year-end rally: Tom Lee
So will the fourth quarter, which begins on Monday, continue the bullish trend?
Unfortunately, marshaling stats all day can obscure but can never alter the fact this question is patently unanswerable.
