Fourth Quarters Usually are Friendly to Stock Markets

Stock Markets

Stocks go up by 4.3% on average during the fourth quarter. If you like to bet on the average of what happens over many years, you can find yourself in trouble on off years.

The fact that the stock market tends to go up in the fourth quarter by a fairly nice amount, 4.3% on average, may be interesting trivia, but this is not data that we want to ever put too much weight on, and especially realize that this isn’t data that even should mean anything to us.

All quarters have positive returns over time though, but we know that there are a lot of quarters that book losses rather than gains. Since stocks do increase in value over time on average, this fact has many investors staying the course and remaining in their position for many years.

These investors won’t care about which quarter delivers better results on average, or often times, anything else for that matter. They will just hang in there regardless, and will also ignore any evidence that this might be a good time to get out if you are prone to. For better or worse, they simply are not.

We might want to ask who really pays attention to all the banter about the market’s prospects that we see throughout the year, and this comes down to a particular investor’s threshold. Quarterly trends won’t usually get that many people out of their seats though unless the move is of a sufficient magnitude.

Staying or leaving therefore depends a lot more on magnitude than time, and almost completely so in fact. We do take account of the past when we do this though, measuring trends of various lengths and then determining whether our chosen trend has broken or not, meaning that its path has fallen enough so that we can say that we are going the other way now.

Looking at aggregate quarterly results doesn’t really speak to this at all, because each year is different. In order to make accurate predictions about anything that deviates as much as stocks do, we need to be looking at what is going on lately, not 20 years ago.

80% of the time though, stocks go up rather than go down during the fourth quarter. This means of course that it goes down 20% of the time, or has at least. If we really do want to use this data, the task then becomes to decide which scenario is more likely, the 4 out of 5 when things go up or the 1 out of 5 that sees the market decline.

We also need to realize that we shouldn’t be weighting past years equally, as the more recent the data, the more relevant it tends to be. Last year, we had a terrible fourth quarter, and this counts for more than a quarter many years ago, or even the year before.

The reason for this is because markets evolve, and they sure have over the years. We could work this all out, but that won’t be near enough, as there are other things that matter, such as what has happened in recent quarters. The last one will need to be weighted the most once again, and this puts us in a position where we’re just measuring trends.

We won’t be measuring them as well as we would doing so directly though, so no matter what kind of statistics we come up with, they won’t be as relevant as just looking at current trends will be, of whatever length. Quarterly trends are just snapshots, we need to see the lines.

Investors prefer longer trends of course, but these trends will always matter more than any isolated statistics that we can come up with. Trends of a duration of a quarter in length aren’t just that meaningful to the majority of investors that read these things and perhaps scratch their heads a little.

Lots of Things Move Markets, But History Is Not One of Them

The big reason why this particular statistic isn’t so meaningful is that this just does not have much relevance to the markets itself. If the fourth quarter gains 80% of the time, this might lighten the mood a little, but it really won’t do much in the face of downward pressure such as what we had in the fourth quarter of 2018 or the way it is starting out, just two days in.

There are certain things that just don’t deviate very much or perhaps not at all, such as if we rolled a five-sided die every quarter and placed an even money bet on it not coming up a 1. The reason that this is valid is because the odds don’t change over time with this, where with stocks, they do and do change a lot based upon what is going on during a particular instance of this.

It’s nice to try to simplify things like this but we never want to attempt to oversimplify too much. As an analogy, if it only rains one day out of five, this will provide us with an expectation that it likely will not rain on any given day. Weather forecasters aren’t going to just stop here though and just tell us every day that it probably won’t rain, because each day is different and has a different probability of raining depending on current weather patterns.

If you look outside to see whether it is cloudy or sunny, the odds of rain will go up when it is cloudy. Forecasters will look at weather patterns that are occurring in other areas to see what weather may be coming our way, which allows us to refine these predictions.

This is a lot like our looking at factors such as current trends or factors that are affecting the mood of the market and put this all together to come up with a much more accurate forecast than looking at years of weather data and looking to use the average of that. It would be foolish to look to predict the weather based upon these averages and it’s on the foolish side as well to try to do that with stocks as well, because the influencers of both are so variable.

When we compile all the things influencing the market these days, from the fact that it is up this year, it is up on longer trends, it is down since mid-September, there are worries about recessions, the trade war rages on, more people are investing these days which is propping up the market, and a host of other influences that distinguish and define 2019 versus other years.

It’s not that we just want to ignore stats such as this 80% ratio or the average gain of 4.3% during fourth quarters in the stock market, but we need to make sure that we keep it in perspective. This actually should factor in, by setting the table so to speak where if all things are equal this will happen, and then look to discover what isn’t equal and add that to the mix.

This information is still only really valuable for entertainment purposes, as this should be viewed much like our rain example, where we’re looking around and deciding which is which. If the skies are dark, this will change things a lot, and whenever we are playing stocks, we want to make sure that we’re taking account of all relevant distinctions.

Taking a look around right now, the skies are plenty overcast, from both the pullback that we’re in and the lesser mood of the market. The fundamental part of the equation always comes down to mood because mood drives stock prices and everything else just affects mood, so it is the most fundamental thing among fundamental influencers.

Looking Ahead to the Future Can Be Fun, But We Decide in the Present

It can seem nice to want to look ahead more, like for instance over a quarter or a year or even longer, but whatever goes on with markets evolves over time and each day brings more information. Looking to predict what will happen in the fourth quarter at all is actually more entertainment than anything, because no one has to decide what they will be should be doing that far in advance or any further than the present in fact.

There are two things that predicting a bullish fourth quarter being likely based upon past years brings to light, and they are the fact that this information isn’t really that meaningful nor would any prediction be for this length of time. It can be fun though, but too many people take this more seriously than they should.

If you are the manager of a baseball team and select a starting pitcher for the game, his overall record thus far will matter to his being selected, but beyond that, you watch how he does. We need to watch how stocks do if we’re looking to predict them, and we need to keep watching them as you watch your pitcher throw every pitch.

The pitcher might last 6 innings on average but predicting how many innings he will last, like trying to predict where stocks will be at the end of the quarter, might be fun but is really quite pointless. We don’t want to be deciding this now, nor do we ever want to, for instance deciding that the pitcher should last 6 innings and want to make a pact to leave him in that long and pull him then.

For most investors, this isn’t about selecting pitchers, as this is what traders do, it’s about remaining as a fan of your team. Perhaps your team will do so terribly over so many years that you will abandon them, but most of the time, win or lose, you’re still going to root for them and stay with them.

If investors shouldn’t care about quarterly predictions, what about traders, who hold stocks for much shorter periods of time? Traders don’t care about next week let alone next quarter, and may not care about even later that day if they trade very short-term, although what really happens is that they care about the future but will decide as it unfolds.

The trends and the mood do matter though, but it isn’t where the trend will be or where the mood may be at the end of the year, as what matters is what is going on right now.

For what it’s worth, this quarter has started out looking more like last year’s, meaning that we might get one of those 20% outliers when stock indexes go down over this quarter, but lots can happen and change in 3 months. We need only look at the first three quarters to see how much things can change within a given quarter.

Looking at charts instead is by far the best approach here, and the only valid one in fact since charts tell the entire story with complete accuracy, where looking at anything else will involve distortions.

We’re in a downtrend now on the daily charts and even the weekly charts are breaking down right now. This is nothing that would shake any investor out of their positions, or even cause the more sensitive ones to want to reduce them, because it’s just not meaningful from their perspective, one much longer than two weeks.

Traders, on the other hand, need to do their best to stay on the right side of trends, which means on the short side right now.

We don’t need to predict 3 months from now or even tomorrow, because tomorrow will speak for itself, if it is allowed to. It will speak anyway, but we may not hear its voice because we are not tuned in, and are instead listening to things that only serve to confuse us such as fourth quarters usually produce gains.

We might end up with a gain or a loss this quarter, but as they say, only time will tell, and only time will tell here means that nothing else will.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.