Why Year-End Rallies Are Common

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Why Year-End Rallies Are Common

In his Daily Market Notes report to investors, while commenting on year-end rallies, Louis Navellier wrote:

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The House of Representatives decided on Thursday night to delay their vote on a smaller $1 trillion infrastructure bill is a clear sign that there remains tremendous infighting within the Democratic Party that is scared of losing their majority in the 2022 mid-term elections. Essentially, any significant tax increase, even for infrastructure spending, would be viewed as a negative development heading into the 2022 mid-term elections.

Furthermore, Senator Joe Manchin made it crystal clear this week that no matter what spending package the House of Representatives passes, he had not been consulted and would likely not support the proposed bill.  This is a very positive development since higher taxes would likely curtail U.S. GDP growth.

Mid-October Appreciation

If history repeats, the stock market should meander higher in October and the appreciation pace should pick up pace in mid-October as the Q3 announcement season commences.

The fourth quarter – like the conclusion of sporting events or Broadway plays – is where the drama lies. Similarly, the third quarter is where the doldrums often occur, making the fourth quarter’s performance all the more refreshing.

September ends a stretch of seasonal weakness for the market that typically begins in May.  According to Bespoke Investment Group, over the last twenty years, the Dow has only averaged gains in one month (July) between May and September, and September has historically been the weakest month of the year whether you go back 100 years, 50 years, or 20 years.

Year-End Rallies

Fortunately for investors, seasonal headwinds turn to tailwinds once the calendar turns to October.  While October is also a notorious month for the market given the crashes of 1929 and 1987, those years were outliers rather than the norm.  Over the last 100, 50, and 20 years, the Dow has averaged gains in October, and the last 20 years have been especially positive with an average gain of 1.22% and positive returns 65% of the time.

S&P 500

Year-End Rallies

Essentially, what happens in the fall is that consumers cheer up as the holidays approach. When we gather with family and friends during Thanksgiving and other holidays, consumer sentiment naturally rises. When consumer sentiment rises, investor sentiment also improves, which is why year-end rallies are common. Additionally, there is a lot of year-end pension funding, which typically starts by Thanksgiving.

Heard & Notable

U.S. debt rises irrespective of who is in the White House. With three Republican and three Democratic administrations since 1981, U.S. debt has risen from below $5 trillion to nearly $30 trillion today. Source: Statista

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One of Wall Street's renowned growth investors, Louis Navellier is the editor of four investing newsletters: Blue Chip Growth, Emerging Growth (formerly known as MPT Review), Quantum Growth and Global Growth. His longest-running publication, Emerging Growth has a track record of beating the market nearly 3-to-1. Navellier is the author of a BusinessWeek best seller, "The Little Book That Makes You Rich", and the Chairman and Founder of Navellier & Associates, Inc.
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