The Other Green Light Flickering for Stocks into Year-End

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What a time to be an investor.

Being constructive on the economy has been the winning ticket. And on Friday that bullish posture got an upgrade as Fed Chair Jerome Powell said the most impactful eight words in all of finance, “The time has come for policy to adjust.”

That soon to be famous string of words effectively green-lighted the long-awaited interest-rate cut beginning in September.

We’ve been all over the stimulative effect that rate cuts have on stocks when the economy dodges a recession.

But turns out there’s another green light that’s beaming for stocks outside of the Jackson Hole presser.

That’s right. The strong momentum stocks have enjoyed so far this year tends to spill over into the final three months of the year.

So, while I want to also set the stage for some likely bumpiness along the way…

Prepare now – and you’ll be ready to take advantage of any weakness to position for fourth-quarter strength.

September is Hurricane Season for Stocks, Too

At last measure, the S&P 500 is putting in a heck of a performance, gaining 18% year-to-date. It’s easy to expect this steady march higher to continue without hiccups.

However, stocks are experiencing hurricane season right at the same time actual storm activity picks up in the Atlantic Ocean.

Historically, September is by far the toughest month of the year.  For some recent proof, consider the last four Septembers:

• September 2020 saw the S&P 500 drop 3.9%.
• September 2021 was worse, with stocks falling 4.8%.
• September 2022 was brutal, with a 9.3% plunge.
• And in September 2023, the S&P 500 made a 4.9% dip.

This red-tinted trend has been in place for decades. Below shows how since 1990, September has been the worst performing month for the S&P 500, with an average -0.9% return:

You may notice how August is also a trying time for markets, with an average -0.6% return. Low liquidity summer months often bring equity storms.

But always remember that after the storm comes sunny skies. Once stocks get past the August – September hurricane season, we should be in for nice, crisp, calm “weather,” as October kicks off a very bullish time of year.

Referencing the image above, you’ll see the opportunity ahead, with:

• October averaging a 1.5% gain,
• November ripping 2.1% higher,
• And December capping off the year with a 1.4% climb.

That’s a good example of how crunching the numbers can really provide clarity on what to do with your portfolio. Wall Street certainly is – in fact, my colleague Jason Bodner found that algorithms, including AI, are taking over 90% of all stock trades. (You can watch his free presentation here on how to turn this into an advantage for you.)

The bullish seasonal data after September should give you courage to buy any potential run-of-the-mill pullback in September.

But as usual at TradeSmith, we’ll take this idea a step further. Here’s even more evidence of why more gains are likely ahead as we approach year-end…

When Stocks Are Up Big Through August, More Gains Follow

Sometimes you need to look backwards to forecast the future.

With this in mind let’s roll back the tape to a year ago. Back then, stocks were screaming through August, up double-digits – like right now.

Around that same time, we gave evidence how big momentum in the first eight months of the year tends to spell market-beating gains into year-end.

Using that same framework, we’ll make the case for a big lift coming in the final months of this year.

First, let’s size up 2024, as year-to-date gains for the S&P 500 now stand at 18%:

At first glance, you may assume such a strong start warrants some profit-taking. But don’t let the YTD chart lead you astray.

Looking back five years instead, we’re reminded that 2021 and 2023 each had similar monster starts to the year through August, with the S&P gaining 20.4% and 17.4%, respectively:

It may surprise you to see that September – December of those years saw healthy gains, too! 2021 had follow-through momentum of 5.3%, and 2023 saw a similar thrust of 5.6%.

Through this lens, it appears that fading this rally is a bad idea. And it is!

But let’s get an even bigger picture. Check this out…

If we look back to 1980 at all instances when the S&P 500 was up at least 10% through the months of January – August, like now, then the average gain in the final four months of the year was a market-beating 4.9%:

That’s a lot of green, if you ask me!

Throw in the latest green light from the Fed, and you’re staring at big gains ahead.

So, how can you play this seasonal pattern?

Easy. Start building an all-star buy list today. If a storm comes for stocks, like it usually does in September, use the lower prices for what they are – a big, fat buying opportunity.

If you’re like me and want to play for bigger potential gains than betting on the market, use cutting-tech software like TradeSmith to highlight the leading stocks poised to benefit.

The green light is flickering.

Ready. Set. Go!

Regards,

Lucas Downey
Contributing Editor, TradeSmith Daily

P.S. from Michael Salvatore, Editor, TradeSmith Daily:

The market is all over the place: rallying one day, crashing the next. But while Wall Street is busy reacting to every headline, don’t miss the real story…

The imminent arrival of artificial general intelligence (AGI).

Right now, the near-term hype around AI seems to be blinding many to the real game-changer on the horizon once AGI takes hold.

Over at InvestorPlace, their macro expert Eric Fry just held a Road to AGI Summit designed to provide everything you need to know about the game-changing technology.

Eric not only wants you prepared to capitalize on these AGI companies before they get mainstream attention… he also wants to show you how to “future proof” your portfolio as best you can for the AGI future. Click here to watch now; it’s free and includes a stock pick to get you started.