Kindest Quarter Arrives for Stock Market That Nothing Can Rattle

(Bloomberg) -- Theories abound as to why the fourth quarter is so often the best one for equity bulls. Fund managers need to catch up, holiday spending spreads cheer, investors celebrate the January effect in December.

Or maybe it's just dumb luck. Whatever the case, the S&P 500 Index has risen seven times in the last eight years between October and December. And while calendar effects just took a beating with a volatility-free September, betting against any form of momentum remains a losing trade until proven otherwise.

Indeed, equities just capped an eighth straight quarter of gains, the longest winning streak since the start of 2015. The S&P 500 climbed 4 percent as corporate earnings posted the first back-to-back double-digit advance in six years, helping stocks endure mounting tension with North Korea, a deadly U.S. hurricane season and escalating political turmoil.

Along the way, returns have started to spread out as money shifted from high-flying tech giants to laggards such as small-cap and value shares. The rotation, spurred by higher bond yields, accelerated this week as President Donald Trump and Republican congressional leaders released a framework for overhauling the U.S. tax code.

All four major major U.S. equity gauges -- the S&P 500, Nasdaq Composite Index, Dow Jones Industrial Average and Russell 2000 Index -- ended September with year-to-date gains gains of at least 9 percent. The last time that happened, in 2013, the S&P 500 rallied an additional 9.9 percent.

In fact, betting on a sloppy close to any year has been a losing proposition since the global financial crisis ended. The S&P 500 rose an average 6.2 percent in the fourth quarter since 2009. Matching that return would lift the index to 2,676 by December from Friday's close of 2,519.36.

“Seasonality is a starting consideration but never an end to itself,” Stifel Nicolaus & Coo. chief equity strategist Barry Bannister, wrote in a note Thursday. He raised his year-end S&P 500 target 100 points to 2,600, citing catalysts including Trump's fiscal plans and stronger global growth.

Not everyone is as bullish. Ten of 18 Wall Street strategists surveyed by Bloomberg see the S&P 500 ending the year at 2,500 or below. David Kostin at Goldman Sachs Group Inc. reiterated his call for 2,400, saying the start of the Fed's balance sheet reduction will result in higher bond yields, weighing on equities.

Others see the rotation into small-caps and banks weakening the bear case for stocks. Jason Hunter, an analyst who watches charts to predict markets at JPMorgan Chase & Co., has expected the summer swoon in tech stocks to lead to a market correction. The breakout in the Russell 2000 doesn't bode well for that cautious call, he said, adding he's watching whether the new leadership groups can power through resistant levels.

The latest rally has revived a buy signal from a century-old charting technique. The Dow Jones Transportation Average rose for eight days in a row, climbing to all-time highs and helping the group catch up with the rally in the industrial measure after they spent the last two months diverging from each other.

That's a relief to adherents to the Dow Theory, an investment approach that stems from observations Charles Dow made a century ago and holds that moves in transportation stocks must be “confirmed” by industrials, and vice versa, to be sustained.

Where should investors put their money heading into the final months of the year? Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, says technology and consumer-discretionary stocks are the two sectors that tend to enjoy seasonal tailwinds because of holiday spending.

Chris Harvey, a strategist at Wells Fargo, recommends investors favor the recent Trump trade, such as small-caps. “We're placing more faith in a rotation rather than an upward market ‘pop',” he wrote in a note.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Richard Richtmyer, Chris Nagi