Time to make some fourth-quarter investing bets
With the unorthodox rhetoric and blitz of attack ads during this presidential campaign, the market’s performance in the fourth quarter that’s just about upon us may prove difficult to divine. A variety of issues is roiling investors, such as market volatility exacerbated by prolonged worry over interest rates and new fears about the banking system, with Deutsche Bank (DB) and Well Fargo (WFC) in the spotlight. Plus, there are the possible nasty surprises from the election itself.
What’s an investor to do? One helpful guide would be history: How did the market perform in past fourth-quarter periods? Well, what history shows isn’t bad at all. The S&P 500 index has gained an average of nearly 4 percent during the fourth quarter since 1945. And more comforting, it increased in price more than 70 percent of the time.
And here’s more encouraging news for the skeptics: Since 1990, which is as far back as S&P has data on the market’s 10 major sectors, the index advanced an average of 5 percent, with all of the 10 sectors registering price increases. But which sectors did better than most?
“Not surprisingly, the cyclical sectors, such as consumer discretionary, industrials and technology posted the greatest returns,” said Sam Stovall, managing director and U.S. Equity Strategist at S&P Global Market Intelligence. However, certain groups, sadly, underperformed. The sectors that posted below-market results were energy, financial, telecom services and utilities.
Since 2016 is another presidential election year, it might also be useful to know how the stock market performed in the fourth-quarter periods of previous presidential election years.
Again, the historical picture looks mighty good, although during the 2008 election year, the market ended deep in the red, losing a whopping 22.6 percent. The other presidential election years in which the S&P 500 saw a pullback didn’t suffer that much damage. The closest to 2008’s 22.6 percent loss occurred in the fourth quarter of 2000, when the market tumbled 8.1 percent, according to the S&P data.
The presidential-election year that saw the market jump the most was 2004, when the S&P 500 rose 8.7 percent, followed by the 8.6 percent advance in 1960. In the fourth quarter of 2012, when President Obama was reelected, the S&P 500 slipped 1 percent.
So which market sectors should do well in the fourth quarter of this presidential-election year? “I think the cyclical sectors should do well again, like technology, industrials and consumer discretionary,” said Stovall. Technology is expected to continue as the leader in helping the economy’s advance, and the industrials are seen as continuing to recover. The consumer discretionary sector is obviously a big bet on the consumer’s participation in the economy’s snapback and growth.
But without doubt, the market is saddled by some sticky problems. “Initial expectations for a fifth-consecutive decline in S&P 500 operating earnings-per-share in the third quarter, combined with elevated valuations, election uncertainty and the increasing likelihood of a December rate hike, could serve as headwinds, tempering end-of-the-year optimism,” warned Stovall.
There’s no denying, however, that the usually positive fourth-quarter period in a presidential-election year could present opportunities for the investor eager to make an investment bet on the elections. In each of the sectors expected to perform well, S&P analysts have picked three stocks they rate as “strong buys.”
In information technology, they recommend Alliance Data Systems (ADS), currently trading at $215 a share for which the S&P analysts have a price target of $270; Xerox (XRX), trading at $10 a share with a price target of $12; and Broadcom (AVGO), now at $170 a share with a price target of $195.
In the consumer discretionary sector, S&P analysts rate as “strong buys” Hanesbrand (HBI), currently at $25 a share with a price target of $32; Harman International (HAR), now at $84 with a price target of $117; and General Motors (GM), currently at $32 a share with a price target of $42.
And among the industrials, Delta Airlines (DAL), currently trading at $39 with a price target of $56; FedEx (FDX), now at $176 a share with a price target of $200; and Masco (MAS), currently selling at $34 a share with a price target of $42.