Salvaging a ruined year in stocks
FUND MANAGERS HOPE S&P 500 WILL RALLY IN FOURTH QUARTER
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Fund managers who pick stocks for a living just watched a good year turn sour. That may not be such a bad thing for everyone else.
It’s an old theory, but one with a basis in improbable pieces of data: the S&P 500’s record of rallying in the fourth quarter, which has happened 25 times in 30 years. Even crazier is the index’s propensity to rise after a midterm election. In 18 instances since 1946, it’s always gone up.
Some see a logical pattern, one in which active managers who’ve struggled for 10 months dash into aggressive bets as the clock winds down. As investors bask in what passes for calm after the worst month in seven years, bulls are hoping for a repeat.
“In the last two months of the year, all institutional investors become short-term investors,” said Matt Maley, equity strategist at Miller Tabak & Co. “They have to be in the groups that are moving.” Research by JPMorgan also suggests hedge funds have built up their broad equity positions from low levels. They’re under pressure as November 15 approaches, the deadline for many investors to put managers on notice to withdraw money. It’s notable that more than $10 billion (Dh36.7 billion) was pulled from hedge funds before they even gave up all their gains for the year.
Since 1988, the S&P 500 has closed higher in the fourth quarter more than 80 per cent of the time, returning nearly 5 per cent on average. Add in election year and calculate from the October low, and that gain more than doubles, according to LPL Research.
Characterising trends in equities is tough right now. The Nasdaq 100 just had a two-day drop that would’ve ranked with the worst of 2017, though framed against the prevailing turmoil can be viewed as a blip in a two-week rally.
October was the worst month since 2011, but two gains in the Nasdaq 100 over the last 10 days exceeded 3 per cent. That also hasn’t happened since 2011.
Balancing act
It’s been a trial for fund managers. Coming off September, with 68 per cent beating benchmarks, large-cap active managers took a beating over the next five weeks. When the dust cleared, only 39 per cent were ahead of their index, compared to 55 per cent last year. But the sell-off also tempered valuations, with S&P 500’s 12-month forward price-to-earnings sliding to lowest since 2016. Money managers like Scott Colyer, CEO at Advisors Asset Management, are buying consumer discretionary, materials, industrials and energy stocks while adding to his tech position. “We’ve corrected for exuberance we had in places like tech, but all we are seeing is moderation.”