7 things to know about historically strong Q4 during midterm election years
- November 1, 2022: Vol. 9, Number 10

7 things to know about historically strong Q4 during midterm election years

by Ryan Detrick

As investor and philanthropist Shelby Cullom Davis observed, people’s decisions in a bear market will significantly impact their investments down the road.

Unfortunately, many people blink at slumping stock market. So, the question is this: Are you going to sell now that stocks are firmly in a bear market?

Many investors have done that over the years and missed out on massive rallies as stocks eventually returned to new highs. This year hasn’t been fun at all for investors, but better times could be coming, and making a rash decision now could greatly impact your investments years from now.

It is now October and history tells us that could be a good thing for higher prices. Let’s take a closer look at the seven indicators surrounding this phenomenon, and the potential for a year-end rally.

First, the fourth quarter is historically the best quarter of the year, with the S&P 500 up 4.1 percent on average and nearly 80 percent of the time.

Second, this is a midterm election year, and the good news is that market gains during these years are backloaded. In fact, October is the best month of a midterm year, followed by the second-best month in November and the third best in December.

Third, midterm election years tend to see weak stock returns in the first three quarters (check for 2022), but the fourth quarter of a midterm is the second-best quarter out of the entire four-year presidential cycle. As bad as things have been this year, the calendar is promising to be a major tailwind.

Fourth, the fourth quarter has historically done even better when September is down big. Given this year saw one of the worst Septembers ever for stocks, this could be another clue a bounce back is possible. To quote Lloyd Christmas (from the movie Dumb and Dumber), “So you’re telling me there’s a chance!”

Fifth, this was the third-worst start to a year ever for the S&P 500. Well, the good news is looking at the 10 worst starts ever to a year saw the fourth quarter higher nine times. Only in 2008 was it red; fortunately, we don’t think we are in that environment. Going out a year, the S&P 500 was up eight times by an average of 25.5 percent.

Sixth, the S&P 500 bear market cracked down 25 percent during September. As bad as that feels to investors, the stock market doesn’t care about what just happened and only cares about what is next. The good news is once a bear market is down 25 percent, the returns going out can be quite strong, with the S&P 500 up nearly 23 percent on average a year later. Additionally, many lows took place soon after this milestone was hit, so a major low could be near. Yes, the 1973-1974 recession, the dot-com bubble and global financial crisis all saw more weakness (and in some cases for a long time), but we don’t see an economy nearly as weak as those episodes. Therefore, we think this time will play out like the others, and stronger returns could be quite likely.

Seventh and lastly, October is known as a bear market killer. Remember, 2022 was the worst start to a year since 1974 and 2002. But the record shows that markets tend to bottom in October and, sure enough, both of those vicious bears markets ended in October. The 1973-1974 bear market ended Oct. 3, while the dot-com bust bottomed on Oct. 9.

Investors are worried, and that’s understandable. Could stocks bottom and rally? We think there’s an above-average chance — and a chance is all we need, as Lloyd Christmas would say.


Ryan Detrick is chief market strategist at Carson Group. Read the original version of this article here.

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