The S&P 500 has risen in 34 of the last 41 fourth quarters since 1985, historically its strongest quarter of the year. The Federal Reserve's rate hike this week revives comparisons to 2018, the last time a similar setup turned the fourth quarter into a sharp loss.
The Federal Reserve raised interest rates on Wednesday for the first time since 2023, and the S&P 500 finished that session around 7,550, still up about 10% for the year but about 3% below the record high it set in mid-August. Investors now head toward October with a fresh reason to worry, yet the calendar is about to turn to what has historically been the market's best stretch of the year.
The strongest quarter
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 fourth-quarter gain of about 4.4%. Since 1950, the index finished the quarter higher in 61 of 76 years, or 80% of the time, with an average gain of about 4.2%; the first and second quarters each averaged about 2% over that stretch, and the third quarter less than 1%. The median fourth-quarter gain since 1985 runs closer to 6%, because a handful of terrible years drag the average down.
The setup does not argue against the pattern this time either. Since 1950, the index has entered the fourth quarter up 10% or more for the year 31 times, and it finished those quarters higher in 26 of them.
When the quarter misses, it misses big
The S&P 500 has finished the fourth quarter lower seven times since 1985. Four of those declines, in 1994, 2000, 2007, and 2012, were single-digit dips.
The other three were worse: the fourth quarter of 1987, which contained that October's crash, cost the index about 23%, the fourth quarter of 2008 arrived in the depths of the financial crisis and cost about 23% as well, and the fourth quarter of 2018 fell about 14%. None of the three failed because of the calendar — each followed a shock: a one-day crash, a credit crisis, or a Federal Reserve tightening into year-end.
The index had even entered the fourth quarter of 1987 up more than 30% for the year, so strong momentum did not help when it mattered most.
A rate-hike echo of 2018
This week's Fed decision raised its benchmark rate to a range of 3.75% to 4%, its first increase since 2023, and the central bank said inflation remains elevated, leaving room for another increase before year-end. The last time the fourth quarter went badly wrong, the Fed was likewise raising rates as the year closed, including a hike delivered late in the fourth quarter of 2018 — a quarter in which the Nasdaq Composite fell about 17%.
The S&P 500 enters October at more than 25 times earnings, well above its long-run average, so a good quarter, if it comes, starts from that price. The seasonal record is a set of odds — about four wins in five — never a promise.
Sources: Fool, Motley Fool
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