Theories abound as to why the fourth quarter is so often the best one for equity bulls. Fund managers need to catch up, holiday spending spreads cheer, investors celebrate the January effect in December.
Or maybe it’s just dumb luck. Whatever the case, the S&P 500 Index has risen seven times in the last eight years between October and December. And while calendar effects just took a beating with a volatility-free September, betting against any form of momentum remains a losing trade until proven otherwise.
Indeed, equities just capped an eighth straight quarter of gains, the longest winning streak since the start of 2015. The S&P 500 climbed 4 percent as corporate earnings posted the first back-to-back double-digit advance in six years, helping stocks endure mounting tension with North Korea, a deadly U.S. hurricane season and escalating political turmoil.
Along the way, returns have started to spread out as money shifted from high-flying tech giants to laggards such as small-cap and value shares. The rotation, spurred by higher bond yields, accelerated this week as President Donald Trump and Republican congressional leaders released a framework for overhauling the U.S. tax code.
All four major major U.S. equity gauges — the S&P 500, Nasdaq Composite Index, Dow Jones Industrial Average and Russell 2000 Index — ended September with year-to-date gains gains of at least 9 percent. The last time that happened, in 2013, the S&P 500 rallied an additional 9.9 percent.
In fact, betting on a sloppy close to any year has been a losing proposition since the global financial crisis ended. The S&P 500 rose an average 6.2 percent in the fourth quarter since 2009. Matching that return would lift the index to 2,676 by December from Friday’s close of 2,519.36.
“Seasonality is a starting consideration but never an end to itself,” Stifel Nicolaus & Coo. chief equity strategist Barry Bannister, wrote in a note Thursday. He raised his year-end S&P 500 target 100 points to 2,600, citing catalysts including Trump’s fiscal plans and stronger global growth.
Not everyone is as bullish. Ten of 18 Wall Street strategists surveyed by Bloomberg see the S&P 500 ending the year at 2,500 or below. David Kostin at Goldman Sachs Group Inc. reiterated his call for 2,400, saying the start of the Fed’s balance sheet reduction will result in higher bond yields, weighing on equities.
Others see the rotation into small-caps and banks weakening the bear case for stocks. Jason Hunter, an analyst who watches charts to predict markets at JPMorgan Chase & Co., has expected the summer swoon in tech stocks to lead to a market correction. The breakout in the Russell 2000 doesn’t bode well for that cautious call, he said, adding he’s watching whether the new leadership groups can power through resistant levels.
The latest rally has revived a buy signal from a century-old charting technique. The Dow Jones Transportation Average rose for eight days in a row, climbing to all-time highs and helping the group catch up with the rally in the industrial measure after they spent the last two months diverging from each other.
That’s a relief to adherents to the Dow Theory, an investment approach that stems from observations Charles Dow made a century ago and holds that moves in transportation stocks must be “confirmed” by industrials, and vice versa, to be sustained.
Where should investors put their money heading into the final months of the year? Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, says technology and consumer-discretionary stocks are the two sectors that tend to enjoy seasonal tailwinds because of holiday spending.
Chris Harvey, a strategist at Wells Fargo, recommends investors favor the recent Trump trade, such as small-caps. “We’re placing more faith in a rotation rather than an upward market ‘pop’,” he wrote in a note.
Donald Trumps unlikely rise to power is providing a shot in the arm for global financial markets, with stocks and metals rallying on optimism that his fiscal-stimulus plans will boost the economy. Bonds tumbled.
The MSCI All Country World Index erased its monthly decline and the Dow Jones Industrial Average climbed to a record high. Copper posted its biggest back-to-back surge in three years, gaining alongside lead, zinc, tin and aluminum. The dollar rose against most major peers, while government bonds extended their selloff as Trumps win bolstered bets on faster inflation. Latin American equities, debt and currencies plunged on speculation that higher U.S. interest rates would damp the appeal of riskier emerging-market securities.
Traders are betting Trump will lower taxes, ease corporate regulation and ramp up spending to spur the worlds largest economy. Hes pledged to at least double the $275 billion five-year building plans of Democratic rival Hillary Clinton, while saying infrastructure will become second to none with millions working on projects. A statement posted on the president elects official transition website said the new administration will replace the Dodd-Frank Act financial-sector law with pro-growth policies.
People are going through the possibilities about what Washington looks like today and what Washington can do or not do for them, said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. Corporations feel theres a less restrictive hand. People may take that as a positive.
Meanwhile, Federal Reserve Bank of St. Louis President James Bullard and his San Francisco counterpart John Williams stressed the importance of the central banks independence from political influence. Questions remain over Trumps attitude toward Chair Janet Yellen, whom he accused of holding rates low to aid Democratic President Barack Obama. Traders see an 82 percent chance of rate hike next month, according to federal funds futures pricing.
I am not seeing enough volatility here to change my basic projection for the economy, Bullard said Thursday. I think we are basically on track, the same way we were before the election. Our view has called for a single rate increase and I think December would be a reasonable time to implement that increase.
MSCIs global gauge rose 0.2 percent at 4 p.m. in New York. The S&P 500 Index added 0.2 percent to 2,167.48, and the Dow Average jumped 218.19 points. Some of the biggest technology companies from Apple Inc. to Microsoft Corp. sent the Nasdaq Composite Index down. Meanwhile, the small-cap Russell 2000 Index extended a five-day rally to 8.2 percent.
Banks and health-care shares surged on bets a Trump administration will roll back regulatory scrutiny of the industries. Industrial shares rallied as the Republican plans to boost infrastructure spending. Utility and real-estate stocks tumbled as a rout in bonds pushed yields higher, damping demand for the shares relatively high dividend payouts.
Yields are moving their way higher, thats good for banks, said Art Hogan, chief market strategist and director of research for Wunderlich Securities in Boston. If theres going to be a friendlier regulatory environment thats going to be good for banks. Thats the tailwind behind financials we havent seen for a long time.
The Stoxx Europe 600 Index erased gains as a slide in utility and real-estate shares outweighed a rally in banks. The MSCI Emerging Markets Index dropped to the lowest since August, with benchmarks in Argentina, Mexico and Brazil slumping more than 3.2 percent. Russian shares rallied on bets Trump will mend ties with Moscow.
Benchmark 10-year note yields rose eight basis points, or 0.08 percentage point, to 2.14 percent, according to Bloomberg Bond Trader data. They were on course for the highest level since January. The yield on 30-year bonds increased 10 basis points to 2.95 percent, after jumping the most since October 2011 Wednesday.
Treasurys $15 billion 30-year debt auction Thursday again showed waning investor appetite for U.S. debt as Trump is seen ramping up spending to boost the economy, potentially widening the budget deficit and stoking inflation.
Investors from Pacific Investment Management Co. to TIAA Global Asset Management see the surge in long-term U.S. Treasury yields as a sign inflation will in fact be on the rise. That means the long-dormant part of the Feds dual mandate could force policy makers to act more swiftly to raise borrowing costs than they have in 2016.
We see a higher and more balanced inflation forecast and more rapid normalization of policy, Scott Mather, chief investment officer for core strategies at Pimco, wrote in a note. This means the Fed will move faster on rate increases than the market had been pricing for in the year ahead, he said, adding that he expects two to three rate hikes before the end of 2017.
In Europe, Italian 10-year yields climbed to their highest in almost 14 months amid concern Decembers constitutional referendum may be the next vehicle for a growing anti-establishment mood. In France, where elections are due in 2017, yields also surged.
The biggest exchange-traded fund invested in emerging-market bonds tumbled the most since 2010. The cost to hedge against losses in debt from Argentina and Brazil rose the most among major economies.
The Bloomberg Dollar Spot Index advanced 0.9 percent to the highest level since March. The greenback rose 1.1 percent to 106.87 yen, and added 0.2 percent to $1.0890 per euro.
The dollar will do very well on a broad trade-weighted basis in the next 12 months, Bilal Hafeez, global head of foreign-exchange research at Nomura Holdings Inc. in London, said in an interview on Bloomberg Television. The Fed will be increasing interest rates, the U.S. will be engaging in fiscal stimulus of some kind, which is much-needed by economies around the world, so well have faster growth and more inflationary pressures.
Meanwhile, Latin American currencies tumbled on concern that Trumps administration could usher in a host of protectionist measures after he campaigned on a pledge to protect American workers and companies from unfair trade deals. A trade war would be a blow to economies such as Mexico, which gets 80 percent of its overseas sales from the U.S., and others in the region that depend on exports.
Brazils real plunged the most since 2008, while Colombias and Mexicos currencies each fell at least 3.7 percent.
Most industrial metals rallied on speculation that commodities used to build everything from airports to bridges will benefit under Trumps presidency.
The clearest message delivered by Donald Trump in his election victory speech was a focus on greater infrastructure spending in the U.S., Goldman Sachs Group Inc. analysts including Damien Courvalin and Jeffrey Currie said in a Nov. 9 report. Without specific details it is hard to quantify the impact on commodity demand, however such policies would support steel, iron ore, zinc, nickel, diesel and cement.
Copper for delivery in three months jumped 3.5 percent to $5,601 a metric ton ($2.54 a pound) on the London Metal Exchange, after hitting a 16-month high. Thats pushed up the relative strength index to 90, the highest since data began in 1986. A reading over 70 suggests an asset is overbought.
As optimism mounts that Trumps plans will boost global growth, investors are unwinding options that give holders the right to buy December gold futures at higher prices, with the most-active call slumping for a fourth straight day. Contracts for December delivery fell 0.6 percent to settle at $1,266.40 an ounce on the Comex in New York.
Oil fell after the International Energy Agency said prices may retreat amid relentless global supply growth unless OPEC enacts significant output cuts. West Texas Intermediate for December delivery fell 1.4 percent to $44.66 a barrel on the New York Mercantile Exchange. Brent for January settlement slipped 1.1 percent to $45.84 a barrel on the London-based ICE Futures Europe exchange.
Routs in bonds and emerging-market assets intensified, while the dollar continued to strengthen as investors positioned for the wave of U.S. fiscal stimulus that President-elect Donald Trump has pledged to unleash.
Yields on 30-year Treasuries rose to the highest level since January, with last weeks record debt selloff bleeding into Monday amid losses from Asia to Europe. The Bloomberg Dollar Spot Index climbed to a nine-month high, with the greenback gaining against most major peers. U.S. stocks took a breather as a gauge of shares in developing nations sank to a four-month low. Copper climbed with nickel, while crude oil fell with gold.
Trumps election as leader of the worlds biggest economy is sending shock waves through global markets amid speculation his promise to bolster infrastructure spending will fuel growth and spur inflation, triggering a faster pace of U.S. policy tightening. More than $1 trillion was erased from the value of bonds last week, while equities added that amount and industrial metals soared by the most in four years. Emerging markets are being hit by an exodus of capital amid concern Trump will implement more protectionist trade policies.
Trump has introduced so much uncertainty, around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, uncertainty around the outlook for the Fed, said John Davies, a rates strategist at Standard Chartered Plc in London, which lifted its forecast for Treasury yields on the election. Theres an uncertainty premium, rather than just expectations of much more Fed tightening, being priced into Treasuries, he said. We think theres room for this to continue.
Ten-year U.S. Treasury yields jumped 11 basis points, or 0.11 percentage point, to 2.26 percent as of 5 p.m. New York time, their highest close since early January. Yields surged by 37 basis points last week, the most in three years, amid speculation Trumps plans to boost spending and cut U.S. taxes will swell the budget deficit and fuel price growth. The 30-year yield increased as much as 13 basis points Monday, to 3.06 percent.
Fed Vice Chairman Stanley Fischer said Friday that the central bank was close to achieving its goals of maximum employment and price stability, strengthening the case for a rate hike. Pacific Investment Management Co. says long-term yields may have bottomed out and is predicting three rate hikes by the end of next year. Futures prices indicate a 92 percent chance of a rate hike at the Feds December policy meeting.
Yields will continue to rise over the next year, said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. The fundamentals are very strong, particularly in the U.S. There are some signs of higher inflation pressures. Trump is pushing this phenomenon.
Benchmark 10-year German bunds capped their longest losing streak since May, while yields on similar-maturity Italian debt climbed to the highest level since July 2015. U.K. 10-year gilts extended their slide to a sixth day.
The selloff in Asia-Pacific bonds looked set to extend into Tuesday, with yields on 10-year Australian and New Zealand government debt up at least six basis points in early trading in their fourth rising day.
Bloombergs dollar index, which tracks the greenback against 10 major peers, rose 0.7 percent Monday, rising for a fourth-straight day. The euro fell versus the greenback for a sixth session, its longest run of declines in six months, dropping 1.1 percent to $1.0737.
The yen sank 1.7 percent to its weakest level since early June. Japans economy expanded by an annualized 2.2 percent in the last quarter, data Monday showed, exceeding the forecast for 0.8 percent growth in a Bloomberg survey of economists and easing pressure on the Bank of Japan to further boost stimulus.
The dollar is strengthening along with the rise in U.S. yields, reflecting expectations for economic expansion from fiscal spending, said Yunosuke Ikeda, Nomura Holdings Inc.s head of Japan foreign-exchange research in Tokyo. Japans 2 percent growth can be used as a reason for the BOJ not lowering interest rates for a while.
New Zealands dollar dropped to a one-month low after an earthquake rocked the country early Monday. South Koreas won slipped to its weakest level since June amid growing calls for President Park Geun-hye to be impeached over an influence-peddling scandal. Chinas yuan slid to a more than six-year low in onshore trading, beyond a level at which it was pegged by regulators following the 2008 financial crisis.
The MSCI Emerging Markets Currency Index extended last weeks losses, falling 0.2 percent. Mexicos peso attempted a rebound after a Trump adviser hinted in a Financial Times opinion piece that the president-elect is open to negotiations before imposing import barriers. Trump also pledged during the campaign to make Mexico pay for a wall between the two countries to deter illegal immigration.
Copper rallied as much as 3.4 percent in London before ending the day up 0.2 percent. The metal surged 11 percent last week as Trump vowed to spend more than $500 billion rebuilding American infrastructure, and as Chinese investors stepped up their purchases.
Iron ore climbed to a two-year high on the Dalian Commodity Exchange as data showed rising steel output in China, the worlds largest steelmaker. Goldman Sachs Group Inc. said the initial reaction of iron ore and copper prices to the infrastructure spending proposed by Trump has been excessive and analysts reiterated their view for sequentially lower prices.
Gold touched a five-month low, after sliding last week by the most in three years as the prospect of Fed rate increases under Trump strengthened the dollar.
Oil closed at an eight-week low in New York, slipping 0.2 percent to $43.32 a barrel, as Iranian output rose and the dollar surged.
The S&P 500 Index was little changed at 2,164.20, after slipping 0.1 percent on Friday, snapping a four-day gain that left it up 3.8 percent in the week.
Some of the worlds biggest technology companies including Apple Inc. and Microsoft Corp. dragged the Nasdaq Composite Index down 1.1 percent amid concern over what Trump has said about international trade. Meanwhile, the Russell 2000 Index of smaller companies rallied to a record.
Stocks have outperformed bonds since Trumps presidential election win, on speculation his pledge to spend more will trigger interest-rate hikes amid a pickup in growth and inflation. Equities had their biggest inflows in 17 weeks as bonds saw redemptions, for their largest gap in 12 months, a Bank of America Corp. report on Thursday showed.
Theres a lot of re-positioning going on in the market rather than the whole market rolling over, with the sectors expected to do well under Trump outshining those which should fare worse, said Jasper Lawler, a London-based analyst at CMC Markets Plc. We are starting to see a reallocation according to the fiscal policy.
Banks and miners again provided the main support to European shares amid continued investor optimism about the benefits of a Trump presidency. The Stoxx Europe 600 Index rose 0.2 percent, paring earlier gains. The MSCI Emerging Markets Index fell 1.1 percent
In Asia, index futures diverged, with the yens selloff buoying contracts on Japans Nikkei 225 Stock Average, while futures on other equity benchmarks retreated. New Zealands S&P/NZX 50 Index, the first major gauge to start trading each day, fell 0.1 percent at the start of Tuesday trade.