5 Keys to Q4


Well, the market pulled it off – it finished September with its fifth monthly gain in a row, despite the lingering concern over whether it would live up to its reputation as one of the worst months of the year for stocks. Even more surprising, the Dow gained about 15% in the third quarter, making it the strongest quarter in 11 years.

And now we begin arguably the most important quarter of the year. The market is usually strong in the fourth quarter, but it defied convention in recent months, and a lot of the pros I talk with are not yet convinced we’ll see the usual seasonal strength.

We’ve talked before in Investor Briefand here on the blog about longer-term issues like the Fed’s exit strategy and the danger of a double-dip recession.

Here are some of the key questions investors will watch closely this quarter:

Holiday shopping: Will consumers spend? They didn’t last year, which was one of the worst seasons in memory. The early predictions are that this year won’t be much better, if at all.

IT spending: Will corporations spend? Corporations will be putting their budgets together for 2010, and we’ll begin to get a glimpse of what’s in store for technology in 2010.

Earnings:Growth or cost-cutting? This is actually something we’ll be watching right now as we enter earnings season and get a flurry of Q3 results. Investors I talk with are mindful of the fact that, up until now, earnings have been about cutting costs rather than actual growth in revenues. We’ll find out now and again in three more months whether revenue growth is finally resuming.

New issues: Positive or negative? The answer is actually both. With the sizable rally since the lows in March, we’re seeing more companies go public and other companies raising capital through secondary offerings. That’s certainly a sign of a healthy market. On the other hand, supply could get ahead of demand, particularly if buyers pull back at all.

The market: Has it gotten ahead of the economy? It’s the obvious question, but it’s also the biggest. I think much of the answer will come from the earnings question. If revenues grow and companies offer positive guidance for revenue growth in 2010, the market could well embark on its typical end-of-year rally. If cost-cutting is still the name of the game, investors will grow increasingly uneasy about bidding stocks higher.


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