History hints at Q4 stock market recovery
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Based on averages, Q4 tends to be far better for equities
Reuters
19 August 2011
History suggests that the misery suffered by stock investors this summer should end soon, even if relying on precedent seems risky in this year of surprises.
Based purely on averages, the fourth quarter of any year tends to be far better for equities than the third, the one in which investors are now mired.
Over the past 40 years, MSCI’s world index of developed stocks has gained an average of 3.7 per cent in the fourth quarter compared with a loss of 0.2 per cent in the third.
That might be some consolation for investors who have seen the index fall around 10 per cent since the start of July.
Given that a number of analysts reckon that this summer’s tumble has made stocks a bargain, some may also feel that the time has come to buy. Falls, indeed, have been steep enough on various stock indexes that moves need to be made reasonably soon to make sure that the year as a whole is not a loss.
But even with returns on many traditional safe-haven assets continuing to shrink, investors might want to wait a while longer before jumping into shares, partly because the global economic climate is so fragile but also because historical precedent says they should.
Although the final third of the year, beginning in a fortnight, is on average better than the second, since 1971 the MSCI index has fallen an average of 0.7 per cent in September - the worst reading for any month.
The reason that the end of the year numbers look better than the rest is in large part down to December. It is the best month for stocks, with average gains of 2.2 per cent over the 40 years. Only April comes close with 2 per cent. This year, the MSCI index rose around 4 per cent in April.
So how does all this number-crunching bode for stock investors in the months to come? These are averages, which means that they level out some pretty major events.
In the fourth quarter of 2008, rather than rise the average 3.7 per cent, the index crashed 22 per cent when the collapse of Lehman Brothers accelerated a market rout that lasted well into the new year.
This year, it would not take too much for equities to get back into the black by the end of December.
For all the volatility, developed market stocks still have four and a half months to gain less than 7 per cent for the year to be a wash. A couple of 4 per cent months like April and it is a gain.
Some clearly see that as doable. Russell Investments cut its end-year target for the US S&P 500 index this week to 1,300 from a previous 1,372.
But from Wednesday’s close that would still imply a 9 per cent rise and a roughly 3.5 per cent gain for the year - which with dividends added would not be stunning but would probably do for investors who have been worried about sinking into an abyss.
Russell sees the gain coming from investors looking for a relatively safe haven in US assets and from good company performances.
‘Corporations are doing great. In the US they are doing very well,’ Stephen Wood, Russell’s chief market strategist, said.
Similarly, Bank of America Merrill Lynch reckons investor activity is now giving a ‘buy’ signal, based on its monthly fund manager survey.
The extent to which investors take advantage of such a situation, however, will also depend on how strongly the headwinds that have been facing them continue to blow.
So the historical patterns may not repeat. But they are there for guidance, regardless.