Q4 is Here...What Does The Past Tell Us About The Future?
1.) RSP – What is RSP? It is the S&P 500 Equal Weight exchange traded fund. Instead of treating the largest companies with a heavier weight, this treats all companies in the S&P 500 the same in terms of weighting in the fund. It gives a cleaner look at how things are developing across various sectors versus just looking at the behemoths like Apple and Nvidia. What has it been doing? Nothing great! The equal-weight S&P 500 is on track for its 7th consecutive weekly decline. The only other time that's happened was in the middle of the 2022 bear market, after most of the damage then had already been done. The S&P 500 Index itself (price weighted) is trading in a bullish condition on both a short and intermediate term basis. It’s basically moved sideways since the beginning of August, which usually means consolidation, not exhaustion. However, there are a number of sectors and indexes that have moved to bearish trends – RSP, Financials, Industrials, Aerospace / Defense, Staples, Utilities, Consumer Discretionary, Small caps (Russel 2000), Dow Industrial Index, Dow Transport Index, Value Line Geometric Index. Bottom line is that there has been a lot of corrective action taking place underneath the surface. Is it over? Probably not until we get some reprieve in rates.
2.) GROWTH – Just when it looked like the growth component was looking good, the Atlanta Fed comes out (last night) and dropped their GDP forecast. The Atlanta Fed's GDPNow model estimate for Q3 GDP growth dropped to 3.7% from 5.0% on Sep 25. We have to remember that a +3.7% number, while down a lot from that 5% figure, is still an acceleration from the sequential data point. It’s also good to remember that risk assets in general tend to do well when both growth and inflation are accelerating together. So, while a headline like this – “Atlanta Fed Drops Their Q3 Growth Estimate By 26%” – would be sure to get attention and clicks, it doesn’t mean the party is over. Price action will continue to tell us more. So far the S&P 500 and the Nasdaq are acting fine and trading above key trend levels.
3.) Q4 – Hard to believe but here we are…the first day of Q4. So, given the deterioration in several sectors and indexes, and all the "scary" data I just threw on you...what is the set up for the S&P 500 as we head forward? Well, to look forward, we often have to look backward first. The S&P 500 just had a +14% Q2 followed by a positive Q3. Here is how Q4 has been during every previous year with a similar setup. While history doesn’t necessarily repeat, it does tend to rhyme. Performance wise, our models are managing the risk under the surface. While the Dow and Russel 2000 were negative for Q3 and the S&P 500 and the Nasdaq were positive for Q3, all of our models produced a positive result for Q3. So before we get all nervous that it's going to be a terrible Q4...let's at least consider what history has said.
