It had been four years since ESPN College GameDay visited Eugene. While the game last week between University of Oregon and Stanford was entertaining, Lee Corso’s pick of Ducks proved to be on the wrong side.
In the spirit of the former coach and broadcaster, we use his infamous line, “Not so fast, my friend,” when describing third quarter returns.
Investors that followed the Wall Street adage of “sell in May and go away” left money on the table in 2018. The chart below highlights historical monthly returns compared to what we’ve seen thus far this year.
What’s notable is that historically, July, August, and September usually deliver negative returns for stocks. This was not the case in 2018. The third quarter proved to be very strong, delivering over 7-percent returns as corporate earnings continued to come in ahead of estimates.
So what’s next? The chart above highlights that the fourth quarter is usually the best for investors. Over the last 20 years, we have only seen two negative fourth quarters and those were both down significantly. In 2000, equities were down 8 percent and in 2008, they tumbled 22 percent.
Stocks usually show above-average strength following mid-term elections as seen in the chart below.
Source: Bernstein Research
Current polling and analysis indicate that the Republicans will lose the House and keep their majority in the Senate. If that’s the case, it is likely that stocks will continue to deliver double-digit returns the next year, as seen in the historic data listed in the above chart. Therefore, with favorable seasonality, improving economic growth and strong corporate profits, we believe investors should continue to stay invested in the equity markets.
Week in Review and Our Takeaways
Stocks ended the week slightly negative as trade concerns continued to weigh on equities and the Fed raised the benchmark funds rate to 2.25 percent. The S&P 500 fell roughly 0.5 percent; however, in the face of the Fed action, interest rates fell
The yield on the 10-year Treasury finished the week at 3.04 percent, down from 3.07 percent
Friday also brought increased uncertainty in Europe as Italy increased its estimate for their 2019 deficit. This resulted in a spike in yields from 2.88 to 3.14 percent
Economic fundamentals continue to be strong and we still like equities at these levels
We will be watching the fallout from Italy and its effect on the European banks