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These Stock Market Results Bode Well for the Fourth Quarter

Stock market results over the last five months have a historical parallel - and one that bodes well for the next three months.

One of the first lessons of investing is that past performance is not indicative of future performance. That said, stock market results over the last five months have an incredible historical parallel that could mean even greater returns over the next three months.

First, let me say that I did not discover this parallel. Mike Cintolo, our chief growth investing analyst, pointed it out to his Cabot Top Ten Trader subscribers last Friday. And Mike got the data from LPL Financial’s Ryan Detrick.

Okay, now that we’ve got that admission out of the way, on to the statistic that should make any investor feel optimistic that the market’s recent bull run is far from over. The S&P 500 has now risen in each of the last five months, from May through September. Since 1928, this is just the seventh time the benchmark U.S. stock index has pulled off a five-month winning streak in those late-spring and summer months. The previous six times, the index rose an average of 9.6% in the fourth quarter.

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That’s an encouraging trend, especially if you’re among those investors who are worried about an impending correction. Could it be a coincidence? Perhaps. More likely it’s further proof of my boss Tim Lutts’ theory that stock market trends—good or bad—last much longer than most people expect. After rising for 11 months without a single meaningful pullback, U.S. stocks are due for a correction, many analysts have theorized. They’ve been wrong at every turn. And as the above data shows, this is not a new phenomenon.

Future Stock Market Results Will Depend on These Factors

Now, we shouldn’t automatically expect stellar stock market results through the remainder of the year just because there’s a historical parallel. Market performance over the next three months will likely depend on the following three factors:

Third-quarter earnings results. Companies comprising the S&P 500 have posted two straight quarters of double-digit earnings growth for the first time in years. Expectations for the third quarter are far more modest, with economists anticipating just 4.2% growth. If the upcoming earnings season exceeds those expectations, it could push U.S. stocks even further into record territory.

Holiday sales. Beginning with Black Friday—or really Thanksgiving night—the holiday shopping season takes up nearly half of the fourth quarter. With the retail sector struggling as consumers transition from mall department stores and big-box stores to shopping online and at deep-discount chains like Five Below (FIVE) and Dollar Tree (DLTR), those six weeks of holiday shopping data loom particularly large for the U.S. economy.

Unforeseen disasters. The market has been incredibly resilient in the face of three catastrophic hurricanes, escalating nuclear tensions with North Korea, and multiple acts of international and domestic terror, including Sunday’s horrific mass shooting in Las Vegas, the deadliest in U.S. history. But when investor sentiment starts to turn negative, all it will take is a nudge to send stocks plummeting. The next geopolitical- or climate-related calamity could be one too many.

Bottom Line

Stock market results since last November’s presidential election—and the last five months in particular—have been impressive. History suggests there could be more to come. That means buying stocks remains a good idea—even with the market at all-time highs.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.