Where did the year go? I can hardly believe it’s October already. Well, as they say, time flies when you’re having fun. And with the Dow breaking through new all-time highs this week, Wall Street is having plenty of fun.
While many stocks woke up with a little hangover today, I expect big things from the stock market as we wrap up 2018. I want to make sure we’re locked and loaded for a strong finish to the year. So today, I’ll reveal my top four predictions for the fourth quarter.
Prediction #1: Q3 Earnings Season
First, third-quarter earnings season is just around the corner. Alcoa Inc. (AA) officially kicks things off with its announcement on October 17. From there, the earnings announcements will be fast and furious. And it should be an exciting time on Wall Street. Analysts are calling for 19.3% annual earnings growth and 7.6% annual sales growth for the S&P 500, according to FactSet.
Companies that can exceed analysts’ expectations should benefit from a flight to quality. In this environment, investors have been flocking to fundamentally strong plays, like the ones in my premium newsletters.
My Prediction: Look for third-quarter earnings season to spark a flight to quality in October and November.
Prediction #2: Mid-Term Elections
In early November, the mid-term elections will provide clarity and remove much uncertainty. Since the preliminary estimate for third-quarter GDP will be announced just before the November elections, we will find out if voters care more about the economy or certain social issues. If I had to put my money on it, I expect that voters won’t ignore the fact that we’re experiencing some of the strongest GDP growth in three decades.
My Prediction: Regardless of the outcome of the mid-term elections, I expect that the stock market will rally as uncertainty dissipates.
Prediction #3: Holiday Seasonality
After earnings season winds down, we head right into the happiest time of year. November and December are two of the strongest months for stock market. First, stocks are lifted by an “early January effect” that commences as yearend pension funding and annual gift giving heat up.
Second, folks are just happier as they head into the long Thanksgiving weekend, and then into the Christmas holiday. Folks like to get together with food, friends and family. The optimism and goodwill is infectious—it spreads from Main Street to Wall Street.
My Prediction: I expect that history will repeat itself—investor confidence should boost the stock market through the holiday season.
Prediction #4: The Fed’s Interest Rate Policies
The Federal Open Market Committee (FOMC) has two more meetings scheduled for 2018—one in early November and one in mid-December. Now, after its September meeting, the Fed hinted that it may raise rates again in December. Personally, I doubt that the Fed will raise rates again this year. The Fed is shifting from an “accommodative” policy to a “neutral” policy.
My Prediction: The Fed will not raise key interest rates unless inflation exceeds its 2% target. So, there likely won’t be any further rate increases this year.
The Bottom Line
To summarize, we have several seasonal and macro trends working in our favor. Corporate America is expected to keep up the momentum for the third-quarter earnings season. The mid-term elections should clear up some of the uncertainty on Main Street, Wall Street and Capitol Hill. We’re also entering a seasonally happy time of year for the stock market. And finally, the now “neutral” Fed should keep rates unchanged for the rest of the year.
Big Picture Prediction: Between the economic nirvana that we’re currently in, and the promise of seasonal strength, I’m very bullish about the next few months.
So, I consider today’s pullback to be a good buying opportunity.
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