Calculated Optimism.

October 8, 2012

Welcome to Q4. Have yet to put away last year's Christmas lights? Just plug 'em in.
Favorite time of the year. MLB playoffs. My birthday (I'm 23). Halloween. The holidays. And typically, a glorious time to be an investor.
Entering the month, the S&P 500 was up 14.6%. Impressive. Yet, more impressive are the potential returns. Historically, Q4 tends to be very generous to those willing to risk capital.
Large cap equities are in the midst of their most bullish run since 1928. And Q4 will not likely stand in the way. On average, the S&P 500 tends to gain 2.54% in Q4. At that rate, the S&P 500 could hit 1500 by year end.
Over the past twenty years, markets have been positive 80% of the time during Q4. In election years, when the market has been up 10% or better during the first three quarters, the S&P 500 has finished positively each time. With an average Q4 gain of 6.2% (Thanks Bespoke). A 6.2% gain from here would catapult the market past 1530.
Guaranteed? No! Risks? Everywhere. But, risk and reward are happy bedfellows.
The irony is that many Main Street residents are not participating. Even as the market enjoys its best run in years, many are not investing. Investors remain scared. Cynical. In cash or bonds.
Can you blame them?
Equity strategists at Wall Streets' biggest brokerages are bearish. The news is frightening. And we are only four years removed from the smoldering crater that was 2008. Fresh wounds abound.
Heading into Q3 reporting season, companies have issued 145 net negative earnings revisions over the last two months. The economy is not exactly humming along. GDP is depressed. Employment scene is depressing. And all of the typical headline risks remain: European debt, Iran, fiscal cliffs, election uncertainty.
But... Let's think positively.
Wall Street equity strategists are typically wrong. As is Main Street. So, Wall Street is telling Main Street to allocate towards cash and bonds. Main Street is taking the advice. The Wall Street Journal recently discussed how this lack of confidence is translating into less stock market participation. Right when stocks are enjoying a stellar bullish run.
Investors have pulled $138 billion from equity mutual funds and ETFs. Allocated $1 trillion into bond funds. As the equity markets have rebounded mightily, Main Street remains sidelined.
Policy continues to favor equities. Record low interest rates? Readily available liquidity? Quantitative easing? The stock market responds to those things like a fire does to oxygen. The Fed wants you to be rich!
And once this contentious election is out of the way? Watch out! Election years are typically positive for stocks. And this year's trajectory has been following suit.
So, ye of little faith, beware. Like it or not, these markets could end the year with a flourish. Q4 could reward those brave enough to take a calculated risk.
Of course, I'm not offering any guarantees. And my wife says I've been wrong before.

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