Indicator of the Week: Good News and Bad News for the Fourth Quarter

The fourth quarter tends to be weak -- though volatile -- after a lackluster start to the year

Senior Quantitative Analyst
Sep 30, 2015 at 7:00 AM
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The fourth quarter starts tomorrow, and to the third quarter we say good riddance.  The S&P 500 Index (SPX) has dropped 8.7% over the past three months, meaning we're on pace for the worst quarter since the third quarter of 2011, when the SPX fell by 14%. The S&P bounced back pretty quickly that time, gaining 11% in the subsequent (fourth) quarter, and almost 12% in the quarter after that (first quarter of 2012). This week, I'll see how the fourth quarter has typically fared -- and if quick recoveries like four years ago are typical.    

Quarterly Returns: The tables below show the quarterly returns for the S&P 500 over the past 50 and 20 years. The fourth quarter has been the strongest by far, averaging a gain of over 5% in the past 20 years. Weak third quarters are nothing new, averaging a loss over these time frames.                                      

150929Rocky1

Negative Year-to-Date: Stocks have struggled this year, with the S&P down 8.5% in 2015. The table below shows fourth-quarter returns based on how the market has done heading into the fourth quarter.

I was hoping the table would show a historical tendency to spike higher… but that's not the case. In fact, the fourth quarter tends to be relatively weak when stocks struggle through the first three quarters of the year. The S&P 500 averages a 2.5% gain in the fourth quarter, and is positive 60% of the time, after losing ground in the first three quarters. These figures are worse than the alternatives in the table below.

Also, volatility is higher in this scenario, as measured by the standard deviation of the returns. However, since the median return and the average positive are highest when the index is down at this point in the year, it tells me that volatility works to the upside, not just the downside. If I were looking for good news, that would be it.

150929Rocky2

 

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