Here’s Your Chance to Cycle Into Massive Profits

By Sean Brodrick

Many investors are nervous right now. And you can see why. 

The major averages increasingly look like a shrinking handful of giant tech stocks is propping them up. 

But history suggests that what looks like weakness today could be setting the stage for an opportunity.

In other words, this could be a feature, not a bug. I’ll give you two big reasons why.

Reason #1: Q4 Is the Best Quarter of the Year

Cyclically speaking, the market is about to enter one of its strongest stretches of the year. 

So don’t let a little Octoberphobia scare you out of stocks. If we get early-October weakness, I’d look at it as a buying opportunity.

Since 1950, the S&P 500 has risen 80.3% of the time in the fourth quarter. 

Its average gain: 4.2%.

As you can see, Q4 doesn’t just beat the other quarters. It leaves them in the dust.

Why is the final quarter so strong? Three big forces are at work.

• Performance Chasing & Window Dressing: Fund managers who spent the first nine months lagging the market have a problem: The clock is running out. That can trigger a year-end scramble into the market’s higher-beta names as managers try to juice their numbers before Dec. 31.
• Corporate Buybacks Kick Back In: Companies often enter blackout periods around third-quarter earnings. Once those results are out, the handcuffs come off. Buybacks ramp sharply in November and December as companies work through their annual repurchase authorizations.
• A River of Year-End Money: Bonuses, profit-sharing contributions, 401(k) deposits and fresh institutional allocations all pour money into the market. Much of it is automatic. And a lot of it flows straight into index funds.

That alone would be a pretty good reason to look at Q4 bullishly. 

But this year, another cycle lines up behind it — and this one may be even more powerful.

Reason #2: We’re Entering the Presidential Sweet Spot

October of a midterm-election year kicks off the sweet spot of the four-year presidential cycle.

How sweet? 

The three-quarter stretch from Q4 of Year 2 — the midterm year — through Q2 of Year 3 has historically been the strongest multi-quarter run in the entire presidential cycle.

Put those three quarters together, and the S&P 500 has historically gained roughly 18% to 20% on average — better than any other nine-month stretch in the presidential cycle.

This sweet spot has some powerful drivers of its own …

• Relief From Political Uncertainty: Markets can deal with bad news. What they hate is uncertainty. Midterm years are often loaded with policy posturing, tax fears and regulatory anxiety. Once the votes are counted in November, much of that fog lifts — no matter who wins.
• The “Gridlock Premium”: Midterms often weaken the president’s party, producing divided government or at least tighter legislative margins. Wall Street generally likes that. Gridlock makes sweeping tax hikes and regulatory overhauls harder to push through.
• The Pre-Election Push: As the third year of a presidential term begins, policymakers may become more focused on economic growth and consumer confidence ahead of the next election. That can create a more favorable backdrop for stocks, although economic conditions and Fed policy still matter.  

What Should You Buy?

So what do you buy? The easy answer is the Invesco QQQ Trust (QQQ). 

It gives you the big semiconductor, software, internet/platform and consumer-tech names most likely to lead a tech-driven rally, rather than limiting you to the S&P 500’s information-technology sector.

If QQQ’s share price feels a little rich, there’s an easy alternative: the Invesco Nasdaq-100 ETF (QQQM). 

It tracks the same index, but its shares trade for less than half the price of QQQ.

Buying near 52-week highs can feel uncomfortable. But history offers a reason not to let that fear drive your investment decisions. 

The fourth quarter has historically been the market’s strongest. And the presidential cycle suggests the months ahead could offer an additional tailwind. 

Neither guarantees a rally. But with two historically favorable cycles lining up, this may be an opportunity worth watching. 

All the best,

Sean