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Stocks Will Rise in Fourth Quarter if History Is Any Guide

Morgan Korn
Monday, 1 Oct 2012 | 9:10 AM ET

Stocks are falling mid-morning Friday, the last trading day of the third quarter. But the major U.S. market indexes have rallied all year in the face of continued concerns about the health of the U.S. economy, the European debt crisis and slowing growth in China.

The S&P 500 Index (GSPC) has gained more than 6% in the current quarter and 15% since January. The Dow Jones Industrial Average (DJI) is up nearly 5% in the past three months and 10.4% year-to-date.

The economic fundamentals are still weak in the U.S. — the economy grew a paltry 1.3% in the second quarter — but the Federal Reserve's aggressive bond-buying program pledges to stimulate growth have in turn helped lift stocks higher.

Related: Bernanke's Weak Dollar Agenda Won't Boost Growth: Axel Merk

Investors and hedge funds alike have welcomed the Fed's stimulus measures — commonly referred to as quantitative easing — with open arms. Even as the stock market has flirted with new highs, a growing number of investors are becoming risk averse.

According to a new survey by Russell Investments, just 31% of investors say stocks are undervalued — a 35% drop since the beginning of July. There are a lot of questions hanging over the market as it enters the fourth quarter: the outcome of the presidential election, the possibility of a "fiscal cliff" (i.e. a potent combination of large-scale tax hikes and spending cuts) and the likelihood that the tax code will be overhauled.

President Barack Obama and Republican challenger Mitt Romney have a few more weeks to convince voters that their respective economic policies are the best for moving the country forward. The latest Wall Street Journal/NBC News poll shows voters are split on the candidates when it comes to fixing the economy. But 42% of respondents say they believe the economy will improve in the next 12 months.

Related: Americans More Optimistic About the Economy, Poll Shows: Are You?

From an investor standpoint, Americans have benefited under the president. The S&P 500 has increased 74% and the Dow 67% since President Barack Obama took office in January 2009. Another Obama term could mean more good news for investors - at least in the short term.

According to the Stock Trader's Almanac, stocks have advanced in every fourth quarter since World War II (excluding 1948) when an incumbent president wins the election. The Daily Ticker's Aaron Task and Henry Blodget point out in the accompanying video that markets are presently acting like President Barack Obama will be re-elected.

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