The S&P 500, the Nasdaq and the Dow Jones – all entered the bear market this year, having lost about 23.5%, 30.8% and 19.8% so far this year (as of Sep 27, 2022). But the fourth quarter may not see such turbulent trading as it includes all-important holiday season. Over the past decade, the fourth quarter of the year has actually been the best for the stock market, with the Dow, S&P 500 and Nasdaq up at least 4% on average, per a CNBC article.

The S&P 500 had traded positively 80% of the time, according to a CNBC analysis of Kensho, a market data analysis platform. The Dow Jones Industrial Average had added 5% in fourth quarters over the past 10 years, trading positive 80% of the time.

Agreed, inflationary pressure, rising rate worries and recessionary fears are in fine fettle. But those threats are currently priced in the valuation.  Against this backdrop, below we highlight a few sector ETFs that could be great picks for Q4.  

The best S&P 500 sectors over the past decade in the fourth quarter have been the S&P financial sector, industrial sector and materials sector, all posting average returns above 6% and trading positive 90% of the time. Consumer discretionary is another winner, per the above-said CNBC article.

Sector ETFs in Focus

Financials – Financial Select Sector SPDR ETF (XLF Quick QuoteXLF - Free Report) – Zacks Rank #1 (Strong Buy)

Though financial stocks have been weighing on the broader market lately due to flattening of the yield curve, long-term yields may jump in the fourth quarter due to the holiday shopping season and the broad-based risk-on trade sentiments. If this happens and yield curve steepens, the cheaper valuation of the financial sector will give it a leeway to outperform in Q4.  

Industrials – Industrial Select Sector SPDR ETF (XLI Quick QuoteXLI - Free Report) – Zacks Rank #2 (Buy)

Manufacturing activities are decent in the United States. The industry survey for ISM Manufacturing PMI revealed that “business conditions are good, and demand is strong” for the industrials sector. Employment in manufacturing sector has also been decent (read: 4 Sector ETFs to Bet Big on Decent U.S. Manufacturing Data).

Materials – iShares U.S. Basic Materials ETF (IYM Quick QuoteIYM - Free Report) – Zacks Rank #1

Upbeat activities in the infrastructure and industrials sectors made demand for materials high. Orders of Chemical Products remained strong. Earnings season too was upbeat. Companies of the sector delivered a blended beat ratio of 70.6%. As many as 82.4% companies beat on earnings while 70.6% outperformed on revenues. This should make IYM a winning proposition (read: Looking for Earnings Beat? Play 6 Sector ETFs).

Consumer Discretionary – Consumer Discretionary Select Sector SPDR ETF (XLY Quick QuoteXLY - Free Report) – Zacks Rank #1

The late October-December period embraces the key holiday season, which puts the spotlight on the performance of retailers. As loads of sales-boosting events — Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas — fall in this quartile, the sector generally sees a sales boost. Mastercard SpendingPulse says U.S. retail sales are expected to rise non-inflation adjusted 7.1% year over year (up 8.5% versus 2021) for the holiday season, excluding autos and gas. As a result, the consumer discretionary sector has every chance to outperform in Q4.  

Airlines – U.S. Global Jets ETF (JETS Quick QuoteJETS - Free Report) – Zacks Rank #2

A ‘huge surge in travel’ this holiday season is expected this holiday season, per economists, as quoted on Yahoo Finance. In 2020 and 2021, holiday travelling was under pressure due to heightened fear of COVID-19. Thanksgiving and Christmas are normally two of the most traveled holidays in the fourth quarter.

According to Hopper's 2022 Holiday Travel Outlook released in September, the average price of a domestic plane ticket is $350 for Thanksgiving travel and $463 for Christmas travel. These prices are 22% higher than in 2019 and 43% more than in 2021. This makes JETS a compelling buy.