Can Seasonal Trends Help Stocks Sail?

Surging Payrolls Send Economists Scrambling

Michelle Knight, Chief Economist

Please note: This article was originally published by Ropes Wealth Advisors (RWA), a subsidiary of Adviser Investments, before the markets closed on Friday, Oct. 6, 2023.

In today’s news, a blockbuster payrolls report was revealed, sending economists and market strategists back to the drawing board in an attempt to discern the future course of events for the economy and markets.

Nonfarm payrolls rose by 336,000 in September, and additional revisions to previous months meant the overall change in nonfarm payrolls was a gain of 455,000. The September jobs additions were roughly double the 170,000 expected and set the strongest job creation rate since January. Service-oriented jobs led the way, with leisure and hospitality especially strong in September, but education, health care, trade, transport, retail, professional business services and even the government all reflected a brisk pace of hiring.

The unemployment rate remained at 3.8% in September, while the labor force participation rate also held steady at 62.8%, below the pre-pandemic figure of 63.3%. Average hourly earnings are up 4.2% year over year and are reflecting a tapering of increases since 2021, when wage gains were compounding more quickly.

There is no question the labor market continues to exemplify tight conditions, which creates a challenging dynamic for the Federal Reserve and anxiety in the markets as a result. The stronger the labor market is, the more pressure exists for the Fed to keep raising rates and holding them up at these high levels.

Amid this higher-for-longer landscape, the renewed focus on a mounting debt burden, and increasing costs to service the existing debt in a rising-rate environment, longer-term yields continue to push higher. In fact, most Wall Street firms have now revised expectations for interest rates, calling for a 5% yield on the 10-year U.S. Treasury note by the end of December. We are in striking distance today, with the 10-year yielding 4.78%.

What support will the economy have to lean on in this “new normal” of high interest rates? None from the government, as we saw demonstrated in this week’s theater of the absurd. At midnight last Saturday, after much drama, Congress passed a temporary 45-day funding agreement and the president signed it into law, averting a government shutdown. It was an ugly negotiation that ultimately cost Kevin McCarthy his position as speaker of the House of Representatives, and it provides only very temporary relief from anxiety over Washington dysfunction.

In the past, investors typically welcomed a divided government in Washington. Gridlock ensured that little would change. Taking Washington out of the equation meant that Wall Street could fully focus on the fundamentals that drive the lion’s share of asset price returns and portfolio performance—growth, inflation, interest rates and earnings.

But today’s form of gridlock is not quite so benign. There are at least two reasons for this.

First, short-term spending authorizations must be periodically renewed (or eventually replaced by full-year appropriations), meaning that concerns about a potentially disruptive shutdown will soon return. Given the U.S. has experienced eight government shutdowns since the 1990s, this past weekend’s last-minute compromise offers no guarantee that a shutdown later this year or in 2024 can be avoided.

Second, large U.S. federal government deficits have emerged since the global financial crisis—and they have grown even greater since the global pandemic. This requires, at some point, finding durable solutions to reduce deficits and stabilize (never mind reduce!) the stock of government debt relative to gross domestic product. The events of this past week offer scant hope that addressing these long-term challenges is anywhere in sight.

The upshot is that investors have been given only a short-term reprieve from Washington’s issues. Over the next few weeks, focus will return to questions about an economic soft landing, the prospect for slowing inflation, Federal Reserve policy, and the start of the third-quarter earnings season. But this compromise, minutes before midnight, has only delayed fears, not put them to rest.

The conclusion is that investors hoping for a prolonged period of political stability, predictability and strong leadership in Washington are likely to be disappointed. The wrangling of recent weeks has exposed just how deep the intra- and inter-party divisions are and how much these conflicts are hindering effective governing.

For its part, the Fed’s hands are tied. With the labor market out of balance and inflation still not where it needs to be, the central bank may be forced to continue hiking rates until the economic data compels it to cease and desist. Where does that leave us? We need some good old-fashioned growth to see us out of this predicament. The question is: Can we deliver?

There are a lot of headwinds, to be sure. But we believe there are great companies and funds of companies that can deliver. Your strategy is built around those investments, with a healthy dose of high-quality bonds as ballast. The path forward is not “one size fits all” because there is no easy support or stimulus to make it so. Instead, what you own—and the balance between those investments and your goals—will matter more than ever.

What Can We Expect for Stocks in Q4?

Tim Clift, Chief Investment Officer

One of my favorite things about living in New England is observing the seasons change. This year, as the leaves transition from green to red, orange and gold, I’m hoping to see the stock market swing from a red negative third quarter to black.

This is more than just wishful thinking. Since the S&P 500’s inception in 1928, the fourth quarter has historically been the best for stocks.

In the chart below, I plotted the average quarterly total return for the S&P 500 from 1970 through September 2023. In the second chart, I flagged the percentage of time a given quarter’s return was positive over that period.

As you can see, the S&P 500 averages a total return of 4.8% over the final three months of the year. Compare that to an average 3.0% return in Q1 and Q2, and 0.9% in Q3.

Returns are also positive in fourth quarters more often than in any of the others—four out of five times on average since 1970. The third quarter has the worst average return, which held true this year. But over the past 53 years, stocks still gained in Q3 63% of the time. And over all calendar quarters, returns have been positive 71% of the time.

After the S&P 500’s decline in the third quarter, a strong finish to 2023 would be more than welcome. But my team and I don’t construct portfolios to succeed over just the next few months. Instead, we look to the long term. That way, you can participate in these seasonal trends at a risk level appropriate to your goals.

As for what to expect as we close out 2023, earnings are a positive indicator because returns tend to follow earnings. While the estimates will change, earnings for S&P 500 stocks are projected to grow by double digits in 2024.

Similarly, this is the year following a midterm election—and stock market performance in the year following a midterm election is historically better than other years.

Given the uncertainty and upheaval in the world today, it’s good to have both of these seasonal trends on your side. But no matter what happens in the markets over the next few months, we are here to serve you however you need and help you achieve your goals.

Fine-Tuning Your Medicare Coverage

Andrew Busa, CFP®, Director of Financial Planning

Medicare—federal health insurance coverage for people age 65 and up—is a pivotal part of your retirement plan. With the annual election period (AEP) fast approaching (it runs from Oct. 15 through Dec. 7), it’s time to plan any changes you want to make if you are a Medicare recipient. But beware: The devil is in the details.

Here are the four steps we recommend if you want to adjust your plan during the Medicare annual election period.

Understand your eligibility. If you are already enrolled in Medicare, this two-month window enables you to change your supplemental coverage. While the term “open enrollment” implies that this period is “open” to anyone who’s eligible for Medicare, that’s not the case.

If you’re within the seven-month window surrounding your 65th birthday and are ready to sign up for coverage, there is a separate process called the initial enrollment period.

Review your current coverage. It is important you understand your existing benefits before considering a switch. For instance, Medicare Parts A and B—commonly referred to as “Original Medicare”—offer basic coverage that is the same for everyone. (Broadly speaking, Part A covers hospitalization and Part B covers outpatient costs.)

After that, you’ll need supplemental coverage to ensure you have adequate health care throughout your retirement. You can bridge the gaps in Original Medicare by enrolling in a Part C plan (also called Medicare Advantage) or a “Medigap” plan, both of which are supplemental plans administered by private insurance companies.

You can also opt to access Part D, the Medicare prescription drug benefit. The AEP allows you to choose these supplemental coverage options as your health needs change.

Know what you can change. The AEP allows you to:

• Switch from Original Medicare to Medicare Advantage
• Switch from Medicare Advantage to Original Medicare (these first two options are mutually exclusive, you can only do one or the other)
• Switch from one Medicare Advantage plan to another
• Enroll in Part D prescription coverage or change or drop your prescription plan

If you move to Original Medicare from a Medicare Advantage plan, you are eligible to enroll in a Medigap plan. However, be aware that you aren’t guaranteed entry into Medigap when you switch from Medicare Advantage—you may need to apply through a traditional insurance underwriting process and/or accept a higher premium based on your health status.

Assess your options. To make fully informed decisions about supplemental Medicare plans, we recommend periodically assessing your needs. The costs for Medicare Advantage and Part D plans often change annually, so it pays to maintain a list of your regular prescriptions to make comparison shopping easier. If you can, project what your medical costs might look like over the next year to decide if you should switch plans.

For more on Medicare, check out our handy Medicare reference guide.

As always, if you have questions about your situation, please talk with your advisor. They are happy to offer their guidance and advice.

Strategy Activity

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

AIQ Tactical Defensive Growth

AIQ Tactical Multi-Asset Income

No trades

AIQ Tactical High Income

Adviser Market Update

• We see few discernable impacts on the stock market from the Israel-Hamas conflict. Through Wednesday, the S&P 500 was up 1.6% this week following the surprise weekend attacks. Oil prices spiked 4% on Monday when markets opened but declined in the days following as fears that the conflict would spread moderated.
• The yield on the 10-year Treasury note declined to 4.6% by Wednesday after eclipsing 4.8% at the end of last week. We believe the move is partly attributable to an initial flight to safety after the outbreak of hostilities in the Middle East. Last week’s move higher raised speculation that the Federal Reserve may not have to raise interest rates again in the near future, if at all. But time will tell.
• The producer price index, which measures inflation for businesses and service providers, rose more than expected in September, mostly driven by higher prices for food and gasoline. This morning’s consumer price index came in slightly higher than expected. Based on these reports, the Fed is unlikely to change its policy stance.