Saturday, October 03, 2015

Will The Equity Market Finish The Year In Positive Territory?

A portion of the recent equity market volatility can be attributed to the fact a number of factors seem to be at critical turning points. At top of mind seems to be the focus on the timing of the Fed's move to begin increasing/normalizing interest rates. Historically, a tightening of interest rates has led to a slowdown in economic activity. Added to this is the fact corporate profit growth is forecast to be negative as we noted in a recent post, A Few Positive Equity Market Technicals. These two issues alone, a Fed wanting to tightening and weak corporate profit growth, both are playing a part in the market's recent pullback.

Just for grins, if one were to dismiss these fundamental issues and simply look at the history of the equity market itself, are there stats that would suggest the market could finish the year in positive or negative terriory? A couple of articles over the past week addressed this issue. The first article was written by Ryan Detrick. He notes in the article,
  • "...going back to 1928, the S&P 500 has never been positive year-to-date after being down more than six percent after the third-quarter. The S&P 500 was down 6.74% after the third-quarter in 2015."
In the article, he notes the average decline through the third quarter in the 23 years the S&P 500 Index was down was a negative 16%. For this year though, he notes the three quarter decline is -6.74% and is the best starting point for for any of those years. He goes on to note, for the S&P to finish the year in positive territory, the fourth quarter return would need to equal about 7.23%. More insight can be gained by reading his article.

The second article was written by Dana Lyons. his article notes,
  • "going back 140 years, every year ending in a "5" has posted a positive return since 1875. In other words, the last 13 years ending in "5" have left stock investors "high-fiving" each other. It is likely mainly due to coincidence, with a healthy dose of positive Presidential Cycle “Year 3″ tailwind mixed in for several of the years. Nevertheless, it is a consistent and compelling track record."
From The Blog of HORAN Capital Advisors
Source: Dana Lyons

So there you have it, computer algorithms might just force the continuation of the year 5 winning streak or they might decide to force the negative year streak noted in Ryan Detrick's article. Fortunately, as noted in Ryan's article, the market is at the best starting point for negative returns through three quarters.

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