Indicator of the Week: Will the Election Hurt Fourth-Quarter Returns?

What can traders expect to see as the fourth quarter of an election year begins?

Senior Quantitative Analyst
Sep 28, 2016 at 6:00 AM
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The third quarter comes to an end this week, so we are in the home stretch of 2016.  Thus, I will be breaking down in various ways how stocks have historically performed in the fourth quarter. You can see in the tables below, that for the S&P 500 (SPX), the fourth quarter has been the best-performing quarter over the past 80 years, averaging a gain of 3.35%, and coming out positive 75% of the time. The more recent returns, over the past 25 years, are even more impressive. This seems like pretty good news for the next few months. 

Chart 1 SP 80 years

Year-to-Date Sweet Spot?: The table below summarizes the fourth-quarter returns, depending on the return through the first three quarters of the year. The S&P 500 Index is currently up 5.5% for the year, which, based on the table below, might be the sweet spot for stocks. When stocks are up moderately through three quarters -- less than 10% -- the fourth quarter has averaged a gain of 5.5%, with a positive return an impressive 87.5% of the time. Again, this seems like good news for the upcoming quarter.

CHART 2 SP Quarter returns 80 years

Election Years: This year is an election year, which seems like it would be significant for stocks. The table below shows how the S&P 500 has performed over the past 80 years depending on the presidential cycle year. Election years have averaged a return of 1.70%, and have been positive 74% of the time. These are pretty respectable numbers for quarterly returns, but for the over-achieving fourth quarter, they are not that impressive. Before collecting this data, I would have guessed the election years to be the most volatile due to election uncertainty. However, based on the standard deviation of returns, it is just the third-most volatile of the four quarters.

CHART 3 Election year 4th quarter

Fourth-Quarter Path: Below, I show the average path of the S&P 500 in the fourth quarter. Interestingly, during election years, the index looks to struggle through the first couple of months of the quarter. The average return is about breakeven through December, and then finally takes off in the last month to average 1.70%. 

CHART 4 Graph SPX


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