Third quarter. What a mess. Q3 was pretty much terrible and we're glad to have it behind us. There is a lot of pessimism right now about the markets given that we've had three straight quarters this year that have been negative. However, looking ahead at Q4 we don't think anyone should make any assumptions about the outlook simply based on what we've seen this year.
We've seen a lot of dips, but we've also seen a lot of rises. In fact, this year, the market has oscillated (the market has risen to positive territory and fallen back to negative territory) more times than any other year ever. Yet, when you're reading the headlines or listening to the so-called experts it really starts to seem like you aren't going to fare very well in the 4th quarter. Where is this coming from and what is there to be done about it?
Many are asking, "What is going to be the catalyst to this 'boom' we're supposed to see?" Or "What is going to get us out of the doldrums?" They're having a hard time finding something decent to point to.
Here's the thing. It is always going to be the case that they are not going to know what is going to pull the market out of the doldrums. What experts, investors, pundits etc. are relying on is what they've seen in the past. While everyone is busy being scared and searching for the answer, that is usually when we see a rise. We're expecting the worst, and the smallest bit of good news gets everyone excited.
One of our research partners Ned Davis Research (NDR) has a great data point on crowd sentiment. It finds that when crowd sentiment is really high that's generally a bearish time in the market and they're expecting markets to fall. Now let's take the other side of sentiment. One of the lowest points in crowd sentiment was March 6, 2009 (the day the markets bottomed out), and three days later we turned the corner and haven't looked back.
Today's sentiment is at the lowest level we've seen since 2012. We see this as a positive for the Q4 outlook.
Another area of concern is the slowdown in China and the continually falling oil prices. BUT those are the reasons the market has already fallen. Remember, this is a forward-looking mechanism; investors buy and sell on what they think is going to happen. Those markets have already fallen.
Here are a couple more data points to bring up:
- Over the past four years, there's been at least one quarter during those years where we've seen a 10%+ gain.
- People often compare 2015 to 2011. 2011 experienced an 18% fall from its peak yet that year we still finished flat because of a rally in the 4th quarter.
Conclusion: Given this data and the NDR sentiment polls it seems to us like the 4th quarter is setting up to surprise us. Obviously, we don't know what the future holds but we do know that it is important to look at independent and objective data and not opinions from the media.