Strong 4th Quarter, Election Year Supports the Case for a Strong Q1

December 27, 2019
By Bryce Coward, CFA in Markets

Unless something dramatically changes in the final few days of 2019, the 4th quarter for equity market performance will be one to write home about. The S&P 500 is currently on track to deliver about a 9% price return, which would be the second best quarterly performance in the last five and a half years. This momentum surge has implications as we move into the 1st quarter of 2020 and especially so since 2020 is an election year. While we may yet get a correction to work off some of the equity market’s excess, history suggests the odds favor another out-sized quarter of performance in the 1st quarter of 2020.

My 1st table here simply shows the average and median price performance for the S&P 500 going all the way back to 1928. I also show the percent of positive performance outcomes in all 1st quarters. These numbers aren’t particularly impressive. The average and median price performance was about 2% and the percent of positive outcomes was only about 60%.

When we add in the element of an election year the picture doesn’t really improve all that much. Of these 22 instances, the average 1st quarter performance in an election year dropped to just 1.1% even as the median improved to 4%. But the percent of positive outcomes remained at around 60%.

Now, here is where things get interesting. 1st quarter stock market performance was impeccable when following impressive 4th quarter stock market performance. Median performance in all 4th quarters going back to 1928 is abut 4%. When the market returns more than twice that number in the 4th quarter, or 8%, the 1st quarter returned an average of 5.2% and a median of 4.6%. Of the 21 such instances of an 8%+ 4th quarter return, performance the following quarter was positive nearly 86% of the time.

Finally, when we examine the precious few instances of an impeccable 4th quarter of 8% or more in the year leading up to an election, we get the below results. The average and median 1st quarter performance was 6.5% and the hit rate was 100%. Santa has clearly filled our bags with gifts this holiday season, and it looks like some of those gifts will keep on giving in the months to come.


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