Policy & Law
Fourth-quarter forecast: 3 things that could affect markets
Stocks hit their 44th all-time high this week. Tech (+2.5%) was the dominant sector as artificial intelligence (AI) road shows displayed increased demand across the country.
In macro news, U.S. consumer prices rose slightly faster than expected in September. That put a pause on the recent inflation progress. There was a silver lining in the report, though. Shelter, which has proved to be the stickiest part of inflation, dropped the most month-over-month since October of last year.
The 2-year (3.99%) and 10-year (4.09%) rose +7 basis points (bps) and +12 bps on the week, respectively, and 30-year mortgage rates have shot back up to nearly 7%.
In commodities, oil continues to climb. It went up +1.7% this week to $79/barrel as risks of further conflict in the Middle East escalated. Gold retreated -1% from its all-time highs.
Zooming out, stocks have been hovering near the highs for three weeks. Are we due for a fourth-quarter rally? In the rest of today’s note, we explore historical seasonal trends and the events that might affect asset class returns in the final quarter of 2024.
Spotlight
We are now two weeks into the fourth quarter. And so far, a solid economy has brought good returns year-to-date for global assets.
Year-to-date 2024 performance of global assets (local)
Total return %, local currency
Source:FactSet. Sectors shown are represented by: EM Equities: MSCI EM Index; Europe: Stoxx Europe 600 Index; Asia ex-Japan: MSCI Asia ex-Japan index; EAFE: MSCI EAFE Index; World: MSCI World Index; Gold: SPDR Gold Shares Class USD ($/ozt); U.S.: S&P 500 Index; Japan: MSCI Japan; U.S. High Yield: Bloomberg U.S. High Yield Index; U.S. Agg. Bonds: Bloomberg U.S. Aggregate Bond Index; Municipal Bonds: Bloomberg Municipal Bonds 1–17 years Index; EM Debt: Bloomberg EM Aggregate Bond USD Index; U.S. Treasury: Bloomberg U.S. Treasury Index; and Commodities: Bloomberg Commodity Index. 60/40 represented by 60% MSCI World Index for equities (gross total return), and 40% Bloomberg Global Aggregate Bond Index for bonds. U.S. Cash represented by the Bloomberg U.S. 1-3 Month Treasury Bills Index. Data as of: October 7, 2024. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
Can the rally continue? While past performance is no guarantee of future performance, seasonality says yes: The fourth quarter tends to provide a tailwind for markets. Seasonality in financial markets refers to patterns or trends that occur at specific times of the year, influencing the performance of various assets or sectors. These patterns can be driven by a range of factors, including economic cycles, investor behavior and cultural events.
Historically, the fourth quarter has exhibited the best returns on average. Consumers spend more on retail during the holiday season, and the “Santa Claus” rally (where stocks tend to rise in the last week of December) and general optimism moving into the new year tend to benefit the calendar period.
The fourth quarter has the highest returns on average
S&P 500 quarterly return since 1930, %
Source: Bloomberg Finance L.P., data as of October 10, 2024. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
What’s more, when the first three quarters of the year post a positive return (as they did this year), the S&P 500 returns nearly 6% on average into year-end.
But how much should we rely on the averages this year? We think three global events have the potential to affect fourth-quarter asset returns.
1. Geopolitical tensions have escalated. Unfortunately, global armed conflict today stands at an 80-year high. This week was a reminder of that, with the one-year anniversary of the October 7 terrorist attack on Israel by Hamas. Since then, geopolitical tensions have escalated further. Despite calls for restraint from global leaders, Israel is preparing for significant retaliation, potentially targeting Iran’s oil production and nuclear sites.
What we think: When geopolitical risks are elevated, it is important to distinguish between the very important human risks and the more nuanced investment implications. Seasonally, oil tends to have a negative price return in the in the fourth quarter, due to less demand, refinery maintenance, year-end inventory adjustments and other factors. However, since the start of the quarter, which aligns with increasing conflict in the region, oil prices have increased over 6%. Gold, which tends to produce positive returns in the fourth quarter, can act as a safe-haven asset. The precious metal has been hovering less than 2% from its all-time high.
As risks of a broader war in the Middle East continue to simmer, we think both oil and gold could hedge portfolios against geopolitical risk.
Oil and gold have exhibited different seasonal patterns
Oil and gold price return, quarterly, %
Source: Bloomberg Finance L.P. Oil data since 1988, and gold since 1930. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
Regardless of the seasonality, equity markets have historically shown resilience through geopolitical crises. As such, tactical allocations may benefit returns, but maintaining a diversified, goals-aligned portfolio has proven effective.
Geopolitics typically have a fleeting impact on stocks
Average real S&P 500 return vs. return after geopolitical events
Source: Robert Shiller, Haver Analytics. Data as of December 31, 2023. *Note: return refers to price return. Geopolitical events in the above chart refer to 36 events selected from 80 years of geopolitical events beginning with Germany’s invasion of France in 1940 and ending with the war in Ukraine in 2022. And we measured the 3-month, 6-month, and 12-month returns following these events. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
2. Chinese policy stimulus. Chinese equities also tend to get a fourth-quarter seasonality boost. Since 1964, the fourth quarter has been the best-performing quarter for the Hang Seng Index, returning +6.1% on average.
The fourth quarter has the highest returns on average for Chinese offshore equities
Hang Seng quarterly return since 1964, %
Source: Bloomberg Finance L.P. Data as of October 10, 2024. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
The past month has been filled with stimulus packages and policy adjustments in China. From the initial round of stimulus announcements on September 24 to its recent peak, offshore equities returned over 20%, while the onshore index rallied over 26%. The initial rally, which took place over the last two weeks, was driven by a comprehensive combination of policies (mostly monetary and equity market stimulus) and expectations for more (particularly on the fiscal side). But the mood has dampened in recent sessions as markets were disappointed by the lack of further major initiatives.
What’s next? The Ministry of Finance will host a press conference at 10 a.m. local time this Saturday focused on the “greater use of fiscal policy to support economic growth,” which could be the announcement that markets are waiting for to decide if there are more fundamental legs to this rally.
Our take: We see the recent correction as a healthy adjustment after the market rally over the past week. Nonetheless, if further policy support exceeds market expectations of 2-4 trillion RMB supplementary bond issuance, it could lead to another rally in onshore and offshore equities, as well as commodities (China accounted for 57% of world copper consumption in 2023).
3. The U.S. election. Election years tend to throw a wrench into typical U.S. equity seasonality. While non-election years have returned 3.5% in the fourth quarter on average since 1930, that drops to 1.7% in election years. However, even in election years, the fourth quarter is still the second best-performing quarter on average.
Election years still post solid fourth quarters
S&P 500 quarterly returns in election and non-election years, %
Source: Bloomberg Finance L.P. Data as of October 10, 2024. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.
The other seasonal trend that tends to exist during election years involves volatility. The VIX (a gauge of S&P 500 expected 30-day volatility) tends to be higher in election years, with a peak in October. Volatility tends to fade following the election, and the “Santa Claus” rally still visits markets regardless of an election year or not. The last six weeks of the year in election and non-election years averaged +0.2% weekly returns versus +0.1% for all other weeks.
What we think: The typical seasonality during election years will likely persist. Volatility could be elevated until a candidate is declared the winner. After that, markets can forecast policy implications with more certainty. No matter who wins the election, we wouldn’t derail our investment plans. Since 1950, there have been 18 presidential elections and 10 transitions in the White House between Democrats and Republicans. Over those 74 years, U.S. GDP growth has averaged a 3.2% annual pace, and the S&P 500 has compounded at 9.4% per year.
While a seasonality analysis can be a useful endeavor for tactical positioning, we think portfolios and markets are best viewed over the long term. Corporate earnings growth drives equity markets higher, bonds can provide diversification as a hedge to slower growth, and well-balanced portfolios remain crucial to achieving goals. As always, reach out to your J.P. Morgan team for help achieving those goals.
All market and economic data as of October 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
We explore the potential impacts of geopolitical tensions, China’s policy stimulus and U.S. elections.
Alan Wynne
Global Investment Strategist
Published Oct 11, 2024
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