Keep Smiling, Q4 Will Knock Your Socks Off

We are wrapping up a wonderful third quarter tomorrow with large US stocks up over 16% YTD. Sure, Europe and Emerging Markets were not as stellar, but diversification is as important as ever. Tech stocks are leading the way which should be no surprise–the bull market is getting long in the tooth and dividend tax rates could jump come 2013.

Why should we expect a great Q4? There are as many dour econo-headlines as upside surprises coming at us, you say. We agree. But look no further than 2004 as your guide. A controversial President went up against a lackluster opponent and won. The status quo brought positive market returns before and after the election. 2008 reared its ugly head a lot later. Obama is a different case study compared to Bush. The current President may try to sunset the 2003 tax cuts depending on how the Senate race turns out. That’s probably the more exciting election to watch. Stocks won’t like that, plain and simple. We look forward to the debates to prove Romney isn’t Kerry, but we are not holding our breath. Meanwhile, remember that Obama has the Fed at his disposal to juice economic indicators long enough to at least last through the November vote.

We should see large US stocks return over 20% as a group this year. The prospect of hitting 1560-1570 on the S&P 500 is very real simply through peer pressure alone. The 2007 high is on every trader’s radar and the technical picture is all clear for stocks to at least touch these levels soon. This is a bit like reading tea leaves, but psychology is an important component of short-term market returns. Bringing the market back to pre-recession levels is a wonderful story I see grabbing headlines as the election approaches. Maybe Obama will then release a secret tape where he says “You’re welcome one percenters, now go home, pretend you have a fever and forget to vote.”. The reality is that managers will be chasing returns as Q3 comes to a close and that is powerful stimulus in itself to give this rally afterburners. Anybody who thinks 20%+ returns are unicorns forgot the 1990s.

Don’t expect an October without some bumps in the road, but a bountiful harvest awaits investors when all is said and done.