The stock-market seasonality trend has proven to be accurate during the third quarter of 2023, with both August and September living up to their reputation as challenging months for U.S. stocks. However, market strategists predict that this seasonal weakness may pave the way for a stock-market rally in the final quarter of the year.
Historical Performance: The fourth quarter has historically been the most favorable period for the U.S. stock market. According to Ryan Detrick, chief market strategist at Carson Group, the large-cap S&P 500 index has experienced significant growth during this period, rising nearly 80% since 1950. On average, the index has gained over 4% in the fourth quarter, surpassing any other quarter (see chart below).
October Volatility: October is infamous for its extreme volatility, marked by several major U.S. stock-market crashes throughout history. However, despite these incidents, it generally remains a favorable month for investors. Detrick noted that October tends to perform well, especially when stocks have fallen by more than 1% in the previous two months.
As we approach the end of the third quarter, the S&P 500 and the Nasdaq Composite are on track to record their worst month since December, making it their most challenging quarter in 2023 so far. All three major indexes are also expected to suffer their second consecutive month of losses, according to Dow Jones Market Data.
The recent surge in Treasury yields and the U.S. dollar, which has reached a 10-month high against major currencies, has contributed to the market’s decline in September. While bullish trends in the dollar and yields have been evident for months, the Federal Reserve’s interest-rate decision and Chair Jerome Powell’s press conference last week triggered a further rally in rates and the greenback.
U.S. Energy Prices Remain Above $90 a Barrel in September
The U.S. energy prices have continued to hover above $90 a barrel in September, as investors carefully consider the impact of tightening supplies. The decision by Saudi Arabia and Russia to extend their voluntary cuts in oil production through the end of 2023 has raised concerns among investors about the challenges of reducing inflation to 2%. As a result, there may be a need for more interest-rate hikes.
Market Performance in September
The current state of the energy market has had a significant impact on market performance in September. The S&P 500 is projected to end the month with a loss of nearly 5%, while the Dow Jones Industrial Average has fallen 3.6% and the Nasdaq Composite has dropped 5.8%. In August, the S&P 500 experienced a decline of 1.8%, and both the Dow industrials and Nasdaq declined by around 2.4% and 2.2% respectively, according to FactSet data.
Concerns About the Fourth Quarter of 2023
Ryan Belanger, founder and managing principal at Claro Advisors, believes that despite strong seasonal tailwinds, the fourth quarter of 2023 could be weaker than the historical average, potentially pointing towards a recession. Bond yields are currently at a multi-decade high, and with the Federal Reserve still considering raising interest rates, investors may face challenges when it comes to allocating significant capital to the stock market for higher returns.
The Possibility of a Stock-Market Rally in the Fourth Quarter
While many investors anticipate continued seasonal weakness, Detrick of Carson Group remains open to the possibility of a stock-market rally in the fourth quarter. Historically, when stocks have been off by 1% in the previous two months, October has bounced back with impressive gains of 10.8%, 8.3%, and 8.0% respectively.
According to Detrick, the fourth quarter usually performs well, with positive returns in 12 out of 13 instances since 1950. On average, the fourth quarter has seen an increase of more than 7.0%. When the S&P 500 is up between 10-20% heading into the fourth quarter, Detrick expects an even better performance, with an average increase of over 5%. Currently, the S&P 500 has advanced by over 12% in 2023, according to FactSet data.