Stock Market Smarts: Better Times Ahead?

The last three months of the year are usually stock market winners. But there are no guarantees.

If you didn’t like the way the stock markets performed in September, I have some encouraging news for you – if the historical averages hold, the next three months should be somewhat better.

New York-based Yardeni Research has compiled data showing the average monthly performance of the S&P 500 Index dating back to 1928. It confirms that September has been the worst month for the U.S. market, by far, with an average loss of 1 per cent over that period. April is a distant second at -0.2 per cent.

This latest September was below normal, with the S&P dropping 2.6 per cent. Our own TSX/S&P 500 was even worse, losing 4 per cent and the damage was only limited by a big 2.1 per cent rally on Sept. 30.

But if averages mean anything, the worst should be over for this year. Yardeni’s figures show that October, November, and December have all been winners over the 87-year period, although October is usually a highly volatile month.

Of course averages are only that – just because a river has an average depth of two feet doesn’t mean you can’t fall into an eight-foot hole and drown. So take them for what they’re worth – historical patterns and nothing more.

Still, the numbers are intriguing.

October shows a modest rally from the September losses, with an average gain of 0.4 per cent. The momentum picks up in November, with an average advance of 0.7 per cent and reaches a peak of +1.4 per cent in December, thanks to the traditional Santa Claus rally. The buying pattern carries on into January (+1.2 per cent) before slipping back to negative territory in February.

If these patterns hold, we should see some confidence return to the markets in the coming weeks. That said, these are volatile and uncertain times when nothing is clearly predictable.

That’s especially true here in Canada. I’d like to be able to predict a year-end rebound in the TSX but there’s little on which to base any such hope.

The energy sector remains stuck in the low oil price morass and until that situation changes most companies are going to be in survival mode. The only factor that could alter the equation in specific cases would be an acquisition binge by some of the larger players, looking to buy quality assets at deep discount prices. That could also happen in the mining sector, although there are fewer obvious aquisitors to be found.

The rest of the market will likely continue to wobble. The yields of the big banks are starting to look attractive at current levels but investors continue to pummel the shares, apparently in the belief that the weak Canadian economy will eventually result in a drop in profits.

The upcoming election adds to the concern. It now appears that we’ll end up with a minority government, although of what colour is anyone’s guess. That instability in Ottawa will heighten the already elevated degree of market uncertainty.

So in spite of history, I suggest the best approach for anyone considering Canadian stocks right now is to limit new purchases to quality securities that are trading at attractive multiples. Wall Street offers better opportunities because it is more diversified but you’ll still need to be highly selective.

Buying the indexes at this juncture is risky, unless you’re in for the long term. Cash is king in these conditions. If you have some, deploy it judiciously.