Why I Expect the Stock Market to Rally in Q4

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

For all the handwringing about the recent stock market gyrations, the U.S. market hasn’t budged much at all in 2014.

As of yesterday’s close, the S&P 500 is up 3.04% and the Dow Jones is down 1.1%.

With the S&P 500 nudging the mighty 200-day moving average from below, the “doom-and-gloom” crowd is out in full force, proclaiming that “the End is Nigh.”

While I think that makes for entertaining TV commentary, I disagree wholeheartedly.

Below are four reasons I expect the market to rally between now and the end of the year.

I. Lousy Market Sentiment

Unlike bell-bottoms or frizzy hair, pessimism about the U.S. market never seems to go out of fashion.

Broad measures of market sentiment, such as the CNN Money Fear & Greed Index, actually hit zero briefly last week. That Index is now up to five.

More generally, Americans haven’t been this pessimistic about their country since Jimmy Carter’s malaise years. According to a recent POLITICO poll, 64% of respondents believe things in the United States feel “out of control” right now. And 50% said the country was on “the wrong track.”

A few years ago, at least China was going to take over the world and gold was the only safe-haven asset. Today, even these pillars of investment stability are gone.

In fact, the best way to attract the wrath of commentators is to dare to say something positive about the U.S. economy.

Goldman Sachs came out with a bullish piece on the United States recently, citing “American exceptionalism” and recommending that investors own stocks with high domestic sales. Goldman was mocked and flamed mercilessly for its bullishness on U.S. economic growth. One blog urged readers to re-read the report “as many times as necessary until you pass out from laughter…”

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As a contrarian, you could hardly ask for more.

II. U.S. Economy is the Best of the Global Bunch

Look beyond the snide remarks, and the numbers from the U.S. economy are hardly apocalyptic.

The U.S. economy grew at 4.6% in Q2, and it’s expected to grow 3% in Q3. The headline unemployment rate hasn’t been as low as 5.9% since, well, before the financial crash. Housing starts are recovering after a brief stumble. Lower oil prices are acting as their own form of quantitative easing and are putting billions back into consumers’ pockets.

Sure, you can argue that there is a vast left- (or right-) wing conspiracy about how government statistics are tracked. But even so, you’d be hard pressed to argue that Japan, Europe and the BRICs (Brazil, Russia, India and China) taken together are in better shape than Uncle Sam.

You don’t need to look at the world with rose-tinted glasses to see that in the United States, you have a steadily growing economy and falling unemployment — boosted by zero-percent interest rates. And that’s bullish for U.S. stocks.

III. ‘Tis the Season for a Market Rally

The fourth quarter traditionally has been the strongest quarter of the year for U.S. markets. The advent of November also launches the strongest six months of the year. Money invested in Q4 in the Dow Jones Industrial Average since 1950 from November through April has returned an average 7.5 percent. Money invested during the other six months of the year generated only an average yearly gain of 0.3 percent.

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And based on my experience, the Q4 rally tends to be even stronger in global (particularly emerging) markets as investors reposition themselves for the coming year.

IV. Because It Always Does

Don’t worry about the world ending today. It’s already tomorrow in Australia.

— Charles Schultz

Investors are still shell-shocked from the events of 2008. Thanks to Vladimir Putin’s shenanigans, we are on the brink of Cold War II. And according to current Harvard University students, the United States is a greater threat to world peace than ISIS — not that it was any different when I was a student there.

That said, a lot of the bad stuff that was predicted by the “doom-and-gloom crowd” hasn’t happened. We haven’t had Weimer-style inflation. Gold hasn’t hit $5,000. Not a single person has died on a life raft escaping the United States to seek better medical treatment in Cuba. And if you live in Omaha, you’re still speaking English and not Chinese.

Speaking of Omaha, its own Oracle, Warren Buffett, took the airwaves on Oct. 1, saying that he was a big buyer of U.S. stocks, confirming his belief that the current pullback was just one of Mr. Market’s moodswings.

The bottom line?

If you are a contrarian investor with a long-term perspective, today is a good time to buy the market.

In case you missed it, I encourage you to read my e-letter column from last week about how global markets have fared so far in 2014. I also invite you to comment in the space provided below.

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