The Strongest Period of the Year for Equities

We have just started the final quarter of the year and fortunately for US equities, that period has been one of the most wonderful times of the year.

Over the past decade, the fourth quarter has been one of the strongest periods of the year for equities.

Using data for the S&P500 tracking ETF, SPY, the final three months of the year has seen a median gain of 7.86%, with October the month of October showing a median gain of 2.73%

Expanding that research since 1993 (rather than just the last decade) from the end of September through to the end of the year we find the index has tended to trade higher through October and November, although mid-November sees some consolidation before rising into December.

Similarly, December has typically seen some reversal of the prior months’ gain, but a strong finish to the year has tended to make up for the weakness earlier in the month.

The below graph shows the average performance of the S&P500 index (using SPY data)

How did we do this? – We took the data for every day for the SPY and worked out the average gain/loss each day using a decade of data and then using data since 1993, then simply turned it into a graph. It doesn’t mean this year will do the same, but it does show a clear bias for rising stock prices at this time of year.

Going into October 2020 we also have good news from the Consumer.

70% of the US economy is made up of consumer spending, so their habits can make a significant impact. They measure consumer thinking by the monthly Consumer Confidence report.

On September 30th, the Consumer Confidence report was the biggest beat relative to expectations since November 2011 and the largest month-on-month increase since April 2003.

This is an extremely positive indicator. If the consumer is confident they are likely to spend and, being 70% of the economy, that keeps the economy strong.

We took a look at what happened in the past when we saw these large increases in Consumer Confidence and found they tend to occur either at the very end of recessions or in the earlier stages of an expansion.

Could this large increase in confidence be indicating the end of the coronavirus recession and the start of a new leg in economic expansion?

With strong consumer confidence and a strong seasonal bias, we like the look of stocks right now.