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We certainly saw that play out in the first half of this month. The VIX index hit a four-month high as inflation measures came in above expectations. Last week delivered two hot inflation prints — CPI on Wednesday and PPI on Thursday, the latter the largest annual wholesale increase since 2022 — and the bond market's response evolved in real time.
Meanwhile, the AI financing debate remained front and center. CoreWeave, carrying roughly $50 billion in debt, fell painfully last week and has become the market's chosen proxy for the question. Nvidia CEO Jensen Huang — whose company holds about a 10% stake in CoreWeave — found it necessary to state publicly that CoreWeave's financial strength is improving and that Nvidia does not need to backstop it.
Two things happened in the first half of October that look like they contradict each other. The market's most crowded theme shed more than a trillion dollars of value in five sessions. And the most favorable nine-month stretch of the four-year presidential cycle opened on October 1st.
Both are true. Reconciling them is the work.
What Actually Happened Last Week
The headline numbers were ugly enough. The Nasdaq fell roughly 4.5% on the week, its worst showing since late June. Friday alone took the Nasdaq down 2.14% and the S&P 500 down 1.09%, with nearly two-thirds of U.S. issues declining. The semiconductor index extended its losing streak to an eighth consecutive session.
Now look at the Dow (DIA - Free Report) , which gained about 0.7% on the week and finished Friday above 52,000. That divergence is the entire story. Energy rose 2.5% on Friday to lead all sectors as crude approached $100, while health care and staples absorbed flows as well.
When investors are genuinely frightened, they go to cash and Treasuries. They didn't. They moved down the risk curve inside equities and stayed there. That is a correction in a theme rather than a correction in the market, and the distinction matters a great deal for how you position into the rest of the year.
The Calendar Turned in October
Into that noise, the seasonal backdrop quietly became as good as it gets.
Jeffrey Hirsch, who carries on his father's work at the Stock Trader’s Almanac, defines the most favorable stretch of the entire cycle as the nine months running from the fourth quarter of a midterm year through the second quarter of the following pre-election year. We entered that window on October 1st.
The contrast with the stretch immediately preceding it is stark. Over the weak span from the second through third quarters of midterm years, the Dow has averaged a 2.0% drop, the S&P 500 a 2.5% pullback, and the Nasdaq a 6.6% decline. Over the sweet spot that follows, those same three indexes have averaged gains of 19.3%, 20.2% and 29.4%:
Image Source: Zacks Investment Research. Data via Stock Trader's Almanac
Simply put: this quarter, and the next two, are the three strongest out of the entire four-year presidential cycle. The fourth quarter on its own has historically been the best quarter of the year, higher more than 80% of the time with an average gain north of 4%.
Four years ago, this same window opened from the wreckage of a bear market, just weeks ahead of the October 2022 bottom. Valuations had reset and sentiment was washed out. This time we enter it near record highs, with the ten-year above 5% and core inflation accelerating after two hot prints last week.
So, while seasonality improves the odds, it does not remove the risk. Stocks can certainly go up from here and there are reasons to be optimistic. But the cycle is being asked to deliver its best stretch from a much different starting point rather than a cheap one.
Hirsch addresses this directly, and his answer is that a strong starting point does not cancel the pattern. He also makes a second argument worth weighing: his father identified a “super boom” dynamic in which markets surge following war, inflation and heavy government spending alongside a transformative technology.
He sees artificial intelligence fitting that description, and notes that the late-1990s technology boom overrode the four-year cycle entirely. A powerful enough secular force can swamp a seasonal one.
Bottom Line
The good news is that we do not have to speculate for long. Nearly 80 S&P 500 members report this week, bringing the season to roughly a quarter of the index. Meta and Tesla report this evening.
The aggregate picture is strong but concentrated. Our Director of Research Sheraz Mian has the S&P 500 tracking 24.6% earnings growth on 11.7% higher revenues — an eighth consecutive quarter of double-digit growth, with fourteen of sixteen sectors expanding.
The evidence arrives this week. Let the seasonality set your posture. Let the earnings set your conviction.
View the Zacks #1 Rank List
Image: Bigstock
Don't Get Spooked: Stocks Could Still Soar in Q4
October has been known for its volatility.
We certainly saw that play out in the first half of this month. The VIX index hit a four-month high as inflation measures came in above expectations. Last week delivered two hot inflation prints — CPI on Wednesday and PPI on Thursday, the latter the largest annual wholesale increase since 2022 — and the bond market's response evolved in real time.
Meanwhile, the AI financing debate remained front and center. CoreWeave, carrying roughly $50 billion in debt, fell painfully last week and has become the market's chosen proxy for the question. Nvidia CEO Jensen Huang — whose company holds about a 10% stake in CoreWeave — found it necessary to state publicly that CoreWeave's financial strength is improving and that Nvidia does not need to backstop it.
Two things happened in the first half of October that look like they contradict each other. The market's most crowded theme shed more than a trillion dollars of value in five sessions. And the most favorable nine-month stretch of the four-year presidential cycle opened on October 1st.
Both are true. Reconciling them is the work.
What Actually Happened Last Week
The headline numbers were ugly enough. The Nasdaq fell roughly 4.5% on the week, its worst showing since late June. Friday alone took the Nasdaq down 2.14% and the S&P 500 down 1.09%, with nearly two-thirds of U.S. issues declining. The semiconductor index extended its losing streak to an eighth consecutive session.
Now look at the Dow (DIA - Free Report) , which gained about 0.7% on the week and finished Friday above 52,000. That divergence is the entire story. Energy rose 2.5% on Friday to lead all sectors as crude approached $100, while health care and staples absorbed flows as well.
When investors are genuinely frightened, they go to cash and Treasuries. They didn't. They moved down the risk curve inside equities and stayed there. That is a correction in a theme rather than a correction in the market, and the distinction matters a great deal for how you position into the rest of the year.
The Calendar Turned in October
Into that noise, the seasonal backdrop quietly became as good as it gets.
Jeffrey Hirsch, who carries on his father's work at the Stock Trader’s Almanac, defines the most favorable stretch of the entire cycle as the nine months running from the fourth quarter of a midterm year through the second quarter of the following pre-election year. We entered that window on October 1st.
The contrast with the stretch immediately preceding it is stark. Over the weak span from the second through third quarters of midterm years, the Dow has averaged a 2.0% drop, the S&P 500 a 2.5% pullback, and the Nasdaq a 6.6% decline. Over the sweet spot that follows, those same three indexes have averaged gains of 19.3%, 20.2% and 29.4%:
Image Source: Zacks Investment Research. Data via Stock Trader's Almanac
Simply put: this quarter, and the next two, are the three strongest out of the entire four-year presidential cycle. The fourth quarter on its own has historically been the best quarter of the year, higher more than 80% of the time with an average gain north of 4%.
Four years ago, this same window opened from the wreckage of a bear market, just weeks ahead of the October 2022 bottom. Valuations had reset and sentiment was washed out. This time we enter it near record highs, with the ten-year above 5% and core inflation accelerating after two hot prints last week.
So, while seasonality improves the odds, it does not remove the risk. Stocks can certainly go up from here and there are reasons to be optimistic. But the cycle is being asked to deliver its best stretch from a much different starting point rather than a cheap one.
Hirsch addresses this directly, and his answer is that a strong starting point does not cancel the pattern. He also makes a second argument worth weighing: his father identified a “super boom” dynamic in which markets surge following war, inflation and heavy government spending alongside a transformative technology.
He sees artificial intelligence fitting that description, and notes that the late-1990s technology boom overrode the four-year cycle entirely. A powerful enough secular force can swamp a seasonal one.
Bottom Line
The good news is that we do not have to speculate for long. Nearly 80 S&P 500 members report this week, bringing the season to roughly a quarter of the index. Meta and Tesla report this evening.
The aggregate picture is strong but concentrated. Our Director of Research Sheraz Mian has the S&P 500 tracking 24.6% earnings growth on 11.7% higher revenues — an eighth consecutive quarter of double-digit growth, with fourteen of sixteen sectors expanding.
The evidence arrives this week. Let the seasonality set your posture. Let the earnings set your conviction.