The Fourth Quarter Has Been Higher in Thirty Four of the Last Forty One Years

The statistics on fourth quarter performance are unusually strong for a seasonal pattern. Since 1985, the S&P 500 has risen between the end of September and the end of December in 34 of 41 years, with an average gain near 4.4% and a median closer to 6%. Extend the window to 1950 and the index finished the quarter higher in 61 of 76 years, about 80% of the time.

Against that, the other quarters look ordinary. The first and second have averaged roughly 2%, and the third under 1%. So the calendar's most reliable stretch has just begun, and it has begun with the ten-year Treasury at 5.26% and the index earnings yield slightly below it.

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Why the pattern exists, to the extent it does

Seasonality in markets is usually a story about flows rather than about months. Several plausible mechanisms sit behind the fourth quarter figure. Mutual funds finish their tax years in October and stop selling for loss harvesting. Retirement plan contributions and bonus payments concentrate at year end. Fund managers who are behind their benchmark have an incentive to add risk rather than sit on an underperforming year.

None of those are laws. They are tendencies that have applied to a particular market structure over a particular period, and market structure changes. The rise of passive flows, which arrive steadily rather than seasonally, has plausibly weakened several of them.

The bigger problem with the statistic is what it hides. An 80% hit rate over 76 years means roughly fifteen negative fourth quarters, and they were not randomly distributed small losses. They were 1987, 2008 and 2018, which is to say a crash, a financial crisis and a tightening cycle. The pattern works until something real is happening, and then it fails precisely when the loss matters most.

The conditions this particular quarter starts in

Whitmore's Watchlist:
VOO (Vanguard S&P 500 ETF): The index the statistic actually describes.
QQQ (Invesco QQQ Trust): The concentrated growth end, which has driven most of this year's earnings growth.
DIA (SPDR Dow Jones Industrial Average ETF Trust): A price weighted industrial cut of the same market, useful as a breadth cross-check.

The setup is not neutral. The Federal Reserve raised rates in September for the first time since 2023 and sixteen of nineteen participants expect at least one further increase before year end, with meetings on October 28 and in December. The thirty-year Treasury is at its highest since 2002. Business activity surveys point at growth near 5% annualised with input costs at a four-year high.

Earnings are the offsetting force. Third quarter growth is expected at 29.1% year over year on 12.1% revenue growth, which would be the third consecutive quarter above 25%, and reporting season begins in the middle of the month.

That is a quarter with a strong fundamental tailwind and a strong valuation headwind arriving at the same time, which is a different situation from the average of forty one years. The seasonal statistic does not know any of this, because it is a count of calendar outcomes and nothing else.

How to use a statistic like this properly

A base rate is useful as a prior and useless as a plan. Knowing that the fourth quarter rises four times in five is a reason not to panic out of a long-term allocation in October. It is not a reason to add leverage, shorten a time horizon, or move a position forward that was scheduled for next year.

The asymmetry is what makes it dangerous in practice. Acting on the pattern means accepting an ordinary gain in the four good years and the full loss in the fifth, and the fifth is where the outcome is decided. An investor who bought the seasonal pattern in October 2008 was right about the base rate and wrong about everything that mattered.

The reasonable use is the dullest one. If money was going to be invested anyway, the calendar is mildly in favour. If it was not, a strong base rate is not a reason to change the plan, and the specific conditions this quarter begins in are more informative than the average of the last forty one.

Whitmore's Take: Four wins in five is a good prior and a poor strategy, because the fifth year is where the damage happens. Worth letting the seasonal statistic settle nerves rather than set position sizes.

Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

Written by Daniel Whitmore
Millionaire Insiders