- Many investors figured September 2010 was a lost cause.
- But bucking fears of a double-dip recession, the Hindenburg Omen, inflation, deflation, and overwhelming pessimism—September surprised investors.
- September 2010 was the second strongest September since 1926.
- Q4s after big Q3s are almost always positive and have a much higher-than-average frequency of big (+5% or more) and bigger (+10% or more) returns.
September signals the end of summer, and that means different things to different people. School's back in session, there's a morning nip in the air, and the holiday season is just around the corner. But for investors, there's little cause to celebrate September—historically, it has the worst average return of any month and tends to be positive least frequently (though it's still up over half the time). So, coming off the worst August for stocks since 2001, many investors figured September 2010 was a lost cause and braced for bad news.
But bucking fears of a double-dip recession, Hindenburg Omen, inflation, deflation, and overwhelming pessimism—September surprised investors. The S&P 500 was up 9.0% for the month and 11.3% for the quarter. September 2010 was the second strongest September since 1926 (the strongest was +16.9% in 1939).To date, September 2010 ranks an impressive 38th of 1017 total months since 1926. Q3 2010 overall was no slouch either. It was the 14th best Q3 since 1926 (of 85 Q3s) and ranks 45th of 339 total quarters.
With a great month and quarter behind us, what can investors expect for the balance of the year? It's impossible to know with certainty, but encouragingly, Q4 is historically the quarter with the highest return on average (+3.3% mean, +5.2% median) and highest frequency of positive returns (up 77.4% of the time). Some might fear strong Q3 gains may sap Q4 returns, but history shows the opposite is most often true—strong Q3s are usually followed by strong Q4s. The table below shows years with Q3 S&P 500 returns greater than 10% and the subsequent Q4 returns.
Excluding 2010, since 1926 there have been 17 Q3 returns greater than 10%. Of those quarters, 14 of the following Q4 returns were positive—that's over 82% of the time! Other than Great Depression years, Q4s after big Q3s are almost always positive and have a much higher than average frequency of big (+5% or more) and bigger (+10% or more) returns.
Though history is a key ingredient of market forecasting, past trends alone aren't sufficient. Thankfully, we can add improving fundamentals to a strong historical precedent for a positive Q4. US Q2 GDP was revised upward on Thursday (the third and final revision), confirming the economy is expanding, albeit slower than many folks might like. Also on Thursday, the Institute for Supply Management-Chicago business barometer crushed expectations by expanding to 60.4—strongly in expansionary territory. There's even encouraging news on the employment front, US jobless claims edged down.
It's impossible to know for sure if Q4 will follow the historical trends. But as we've said before, it's way too early to count 2010 as a goner—after three quarters of volatility, stocks are up a little for the year. And as we've noted, strong year end moves are more common than many think, and there may be more gains to come. If September can surprise, there's no reason the rest of 2010 can't follow in its footsteps.
Source: Global Financial Data, Inc.