Fourth quarter market outlook: Year-end rebound and midterm elections

2022 brought heavy losses to investors, and many are no longer with us. For those that remain, we’ve made it — to the fourth and final quarter of 2022. Since you’ve come this far, here’s a bit of good news for you…

The last three months of the year tend to be the best, historically. But history is never entirely reliable, so what can investors expect going into the final quarter? First, a recap…

All the things going wrong in 2022:

• The Fed continues its warpath of rate increases.
• A high U.S. Dollar is wreaking havoc on the world.
• Earnings growth forecasts are being slashed.
• War rages in Ukraine, and Europe is still going through an energy crisis.
• The housing market has slowed significantly.

There are still a couple of wild cards in play:

• Consumer spending is holding up — but is on shaky grounds.
• Inflation is showing signs of peaking — but remains too high.
• Unemployment rate is near record lows — but is showing signs of rising.

The big event coming up: Midterm elections

Don’t care about politics? From a market perspective, we’ll give you one reason why this matters.

• Data: In the past 80 years, markets were positive each year following the midterm elections.
• Why? Investors hate uncertainty, and analysts believe the midterm elections remove policy uncertainty.

Villere & Co’s Portfolio Manager Sandy Villere said clients are waiting until after the election results before deploying more capital (WSJ). This year, the midterm elections are being held on Nov. 8.

The lingering fear of a recession

The Conference Board also forecasts a 96% chance of a recession within 12 months, and there’s no shortage of economists expecting one in 2023.

How could a recession impact stocks? Remember, the stock market is forward-looking, so a mild recession is likely already priced into stocks. If a recession does hit, investors would expect the Fed to stop rate hikes or even lower rates — which would be good for stocks.

This doesn’t mean markets can’t fall further if a recession hits harder than expected. But at these levels, the upside potential may be higher than the downside.