Stock Market Outlook: Get Ready for a Massive Rally

Early last month, stocks tumbled as U.S. economic data raised recession fears and yen trades were cancelled. And when September began, the S&P 500 had its worst week in a year and a half.

But on the other hand, that makes the final months of the year a time that has traditionally seen big recoveries.

According to the Bespoke Investment Group, October has historically been the month when the biggest stock market gains began.

“This should make intuitive sense given that August and September were weak months and the market has always been in the end returned from sales,” according to a Friday note.

By his count, there have been 61 rallies of 10 percent or more since World War II, and 19 of them started in October. That’s a third of the total and well above any other month. March has 10, while all other months are in the low to mid range.

Similarly, Ned Davis Research said the stock market is likely to see a “persistent rally” that will be supported by seasonal trends in the fourth quarter. Namely, October through December is usually the strongest three months of the year.

December is also when the so-called Santa Claus rally takes place, as seasonal cheer, optimism about the year ahead, a slow news cycle and low trading volumes often translate into higher stocks.

So far, several market fundamentals have held up. While job growth has slowed, economists point to subdued jobless claims, solid corporate earnings, strong GDP readings and estimates, upbeat retail sales and rising wages.

Jay Hatfield, CEO at Infrastructure Capital Advisors, said in a note Friday that the latest jobs report is still consistent with a growing economy and validates his S&P 500 target of 6,000, implying an increase of 11 %.

That assumes the November election will result in a divided government with neither Democratic nor Republican influence. He also believes that the economy will not only avoid a recession, it will not slow down to a soft landing.

“We continue to believe there will be no landing in the US economy as the bond market has already cut rates for the Fed, with the 10-year Treasury falling more than 100 basis points,” he predicted.

That contrasts with several voices on Wall Street, such as Citi Research’s chief U.S. economist Andrew Hollenhorst, who has warned that recent wage data points to a recession on the way.

In particular, he pointed to the three-month moving average of private sector job gains falling below 100,000.

“The takeaway from the range of labor market data is clear – the labor market is cooling in a classic pre-recession pattern,” he wrote.

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