Fourth Quarter Repeat of 2018?

As of October 1, we are now into the 4th Quarter of 2019. Will it be a repeat of the 4th Quarter of 2018 for stocks? Q4 2018 was really bad. The S&P 500 index was down over 14% for the quarter, and other indexes were similarly down. Moreover, two of the biggest stock market crashes – 1929 and 1987 – both occurred in October of those years. Could history repeat itself this year?

Beware The Fourth Quarter!?

Maybe…

There certainly could be a 4th Quarter correction. The stock market recovered nicely from its 4th Quarter 2018 slump. As I write this, the S&P 500 is within 3% of its all-time high, despite a number of big issues out there that have a lot of investors concerned, such as:

  • Global trade, especially between the US and China;
  • An apparent worldwide economic slowdown excluding the US, at least at the present time;
  • Geopolitical uncertainty, including heightened tensions involving Iran due to tightening sanctions;
  • Flat to slightly inverted yield curve;
  • The longevity of the stock market rally, with the belief we are in the “late innings” of a 10 year plus rally; and
  • Increased discussion in the press about a possible recession.

All of these are valid points. A recession can be a self-fulfilling prophecy if enough businesses scale back because they think everyone else is gearing up for a recession. Stocks are considered to be a leading indicator, and it is the time leading up to an official recession (6 months of negative GDP growth) that have been the worst for stock performance.

…Or Maybe Not?

On the other hand, there is a lot of evidence that we will not be heading into recession and that growth will continue, albeit at a somewhat slower pace. These include:

  • Declining overall interest rates, and the inability of the yield curve to actually invert despite weeks of trying. For example, one year ago, on 10/1/18, the 10 Year US Treasury rate was 3.09%, vs. about 1.6% now. The 2 Year rate was 2.8% a year ago vs. 1.4% now. Rates across the board are much lower now.
  • An accommodative Federal Reserve, which has lowered short-term rates and looks to continue to do so, though perhaps not as quickly as our President wants.
  • Corporate earnings remain strong.
  • Does the US economy necessarily weaken because the rest of the world does? Or might the US economy continue to strengthen in order to take up the slack?
  • US Unemployment remains low at 3.5%, meaning there don’t appear to be layoffs in the face of a potential upcoming recession.

IMO

My opinion is that there will not be a recession at least for the next 18 months. That doesn’t mean the stock market won’t correct due to the volatility and uncertainty out there. It does mean that any correction should be looked at as a potential buying opportunity. I think rates are too low and the Fed is too accommodative for there to be the basis for a repeat of 2018 and a 14% correction in the stock market for the 4th Quarter. As for now, hold your current equity positions (assuming you are well diversified), and potentially look to add to them if you have the cash and you see a dip you can buy.