A Third Quarter to Remember

Dear reader,

Today marks the start of the fourth and final quarter of the year. But before we move on to what lies ahead, let’s quickly summarize the last three months…

The broad market traded higher in the third quarter. The S&P 500 tacked on 5.3% and finished September at its best closing price ever. The Nasdaq 100 rallied in the last two weeks to eke out a gain of 1.7%.

What’s more, several sectors experienced the kind of gains that are typical for a full year…

Some of the best-performing sectors of the third quarter all had one thing in common – they tend to outperform during low-interest-rate environments.

Now that the Federal Reserve has begun a rate cutting cycle, the four big winners of the third quarter have the wind at their backs for a continued rally into 2025.

The utility sector was one of the biggest winners – gaining 18.5% in the three-month period. I’ve discussed this space often here in Market Insights. Utilities put together their best quarterly performance since 2003.

The combination of lower interest rates – which makes dividends more attractive – and the sudden surge in demand for electricity due to artificial intelligence (AI) and data centers has the sector well positioned for success in the years to come.

Homebuilders performed even better in the quarter…

The iShares U.S. Home Construction ETF (ITB) gained 25.8% in the period. The fund’s top four holdings are homebuilders – making up 42% of the allocation.

Lower interest rates played into ITB’s strength. Lower rates equal lower mortgage rates, which makes buying a home more affordable. A housing inventory issue also continues to hang over the housing market, and that could help keep the sector strong well into 2025 and beyond.

Other sectors to watch include the small caps, health care, and technology stocks. Investing across the strength in all of these industries will help diversify a portfolio in the fourth quarter.

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With the third quarter behind us, we can start to consider how the market tends to perform during the last three months of the year.

The market is now entering what has historically been the best period of the year. Take a look at the Bespoke graphic below, which shows just how strong the fourth quarter has been for stocks over the last 20 years, 50 years, and 100 years.

That might sound incredibly bullish as we kick off the new quarter today. But there are two yellow flags to consider…

First, this is an election year, and historically, October has been a down month during election season – averaging a 1.7% pullback. In all non-election years going back to 1983, October is up 0.9%.

The S&P 500 is also entering an unusual period. It just logged its best first nine months of the year since 1997. But since 1945, when the market is up at least 20% through the first three quarters, stocks tend to fall an average of 2.3% in October.

All of this together should make for an interesting October.

My best guess is that it will be a volatile and choppy month. But that should give us plenty of opportunities to buy on weakness and possibly sell into strength.

So stay tuned. A lot can happen as the election plays out in real time over the next five weeks.

Here’s to the future,

Matt McCall
Editor, Market Insights

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