The Q4 Rally Is Just Getting Started

Shah Gilani|October 18, 2024

The fourth quarter has started off with a bang…

The market benchmarks have been making new high after new high.

Of course, we’re all hoping the trend continues through the rest of October, past the election and through November, and ends with a “Santa Claus Rally.”

That’s not just wishful thinking. It’s something you can and should bet on.

Here’s how I know…

Historical trends, economic indicators, and psychological factors all influence likelihood of a year-end rally.

Let’s start with some history.

Stock markets often exhibit patterns, including seasonal patterns. Consistently making new highs is a pattern that – in the absence of some extraordinary outside force, a geopolitical shock or a black swan event – often begets higher highs. That pulls sidelined money into the market, creating momentum and still higher highs.

Seasonality also plays into a rally. Holiday spending, optimism surrounding the new year, and the influx of capital from year-end bonuses all historically have given the markets a boost.

Add to that the biggest economic indicator of four years… lower interest rates.

Whenever the Fed starts to cut rates – and under current circumstances they are expected to keep cutting – borrowers become more confident as the prospect of cheaper money encourages both consumer spending and business investment.

If interest rates remain stable – or better yet, decline – the likelihood of a year-end rally increases significantly as investors will feel more confident in deploying capital.

Additionally, strong employment data correlates with positive stock market performance. If job growth remains robust and unemployment rates continue to hold steady – or decline as they just have – investor confidence typically rises.

Beyond history and economic indicators, psychological factors significantly influence market behavior.

I talk a lot about narrative trading and investing and how stocks and markets can move on stories.

In terms of emotion and sentiment, the latest market-moving narrative gathering steam is that strong earnings and lower interest rates are motivating traders to bet on a strong fourth quarter performance and a year-end rally.

That kind of thinking and narrative-driven buying can be self-fulfilling.

Institutional investors, especially chasing performance in an already momentous year for stocks, have to do their “window dressing” especially into the final weeks of the year. This practice involves buying stocks that have performed well to make portfolios appear more attractive to clients.

That can lead to increased buying pressure in the market, contributing to a strong year-end rally.

Third-quarter earnings season, which is upon us now, can significantly impact market sentiment. If companies report strong earnings and positive guidance, it can bolster investor confidence and increase the likelihood of a year-end rally.

And here’s the good news…

This has already started. Banks kicked off this earnings season with great numbers, which drove most of the reporting banks’ stocks to new highs.

These psychological factors are adding to my conviction for a year-end rally .

Yes, the stock market is inherently unpredictable. But seeing what’s driving stocks higher now and over the short term is reason enough to make some year-end bets yourself.

Don’t sit on the sidelines and miss what could turn out to be a spectacular end to 2024.