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Q4's Historical Performance: Will This Quarter Live Up To Its Reputation?

Historically, Q4 of any year is the strongest, gaining 3.8% in price since 1945 and rising 77% of the time. What’s more, this seasonal strength persisted during mid-term election years, when the 500 recorded an average gain of 3.1% in October, followed by advances of 2.4% and 2.1% for November and December, respectively. In addition, all sectors posted price increases, led by Information Technology (up an average 6.6% since 1990 with a 54% frequency of beating the S&P 500), and Consumer Discretionary, with a gain of 6.2% (and 67% frequency of outperformance). The weaker performers traditionally were Energy and Utilities, gaining an average of only 2.6% each, and beating the market only 42% of the time.

Fundamental factors that we think could prove supportive of equity prices in the coming quarter include low interest rates, a gradually improving U.S. economy, a favorable Q3 EPS and forward guidance, a lack of attractive alternatives, and a high wall of worry. With the Fed likely to keep their finger off of the rate-hike firing button until the middle of next year, combined with continued signs of a strengthening dollar on economic and fundamental improvements, we believe large-cap U.S. equities will resume their march higher once the Q3 window dressing-induced selling spree has settled down.

Taking history one step further, there are 17 sub-industries that beat the S&P 500 by 60% or more during the fourth quarter since 1990: Air Freight & Logistics, Communications Equip., Consumer Finance, Diversified Metals & Mining, Drug Retail, Electric Utilities, Footwear, Health Care Distributors, Homebuilding, Industrial Conglomerates, Integrated Telecom Services, Oil & Gas Equip. & Services, Oil & Gas Exploration & Production, Paper Products, Personal Products, Pharmaceuticals, and Semiconductors.

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