As we head into the back half of Q4 there has been a lot written about the positive historical performance of the final quarter. Sam Stovall of S&P Capital IQ had an interesting post on Oct 2nd summarizing stock market performance data by month since 1945. It shows a clear out-performance in Q4:
As of Friday’s close, the S&P500 is up 3.42% in Q4, which equals almost exactly a third of the ytd gains for the index. True to form Q4 is living up to expectations.
On the other hand, when Q4 performance is bad it sometimes indicates a market transition from bull to bear. Looking back at Q4 2000, the S&P 500 declined 8.25% almost all of the 10% losses for the market on the year. And that was the start of a protracted bear market that would cost the S&P 13% in 2001, and 23% in 2002:
And then again in 2007, the S&P500 closed down 3.8% in Q4, cutting the index’s performance in half for the year. But that was just the beginning as you then got the 2008 bloodbath, where the index closed down 38% on the year:
The purpose of this post is not to predict how this year’s Q4 market performance ends. But there is a bit of symmetry between 2000, 2007 and 2014. And there appears to be a growing level of complacency about the global economy, the geopolitical landscape, and what appears to be the growing safe haven status of U.S. risk assets. So don’t just think of the next few weeks as indicative of 2014. There could be larger lessons to be learned depending on whether we see continued strength or a sharp reversal into year end.