Stocks’ performance in the third quarter was nothing to write home about.
Actually, the final minutes of the third quarter were pretty dismal. Stocks across the board—large caps and small caps alike—ultimately ended the month of September lower. The S&P 500 and Dow declined 4.8% and 4.3%, respectively, while the small-cap Russell 2000 slipped 3.1% lower.
>Many factors played into the late-quarter’s decline, including inflationary fears, China’s growing debt crisis with Evergrande on the verge of default, slowing global growth, and surging energy prices. Many Wall Streeters are now wondering if it’s game over for stocks in the near term, and some are even claiming it’s time to pack it up and go home.
Disclosure: Navellier & Associates does not own China Evergrande Group (EGRNF), in managed accounts. Louis Navellier does not own China Evergrande Group (EGRNF) personally.
But I believe the bearish pundits, market experts, and talking heads are all wrong. They’re too busy selling fear and not the truth. Here’s the truth…
The fourth quarter is historically the strongest three months of the year for the stock market.
The reality is that even with the market’s dismal performance in September, stocks are still gearing up for a strong finish to the year. In fact, in the years when the S&P 500 traded lower in September but was still higher year-to-date, the index continued its climb through year-end.
The folks at Bespoke recently noted that the S&P 500 has slipped lower 25 times in September, yet still maintained positive gains through the end of the third quarter. And in these instances, the S&P 500 posted an average 2.79% gain in the fourth quarter. As I noted above, the S&P 500 dropped 4.8% in September, but the index was still up nearly 15% year-to-date. So, if the market follows historical precedence, we could end 2021 on a higher note.
I should also add, according to Bespoke, the Dow has rallied an average 4.5% in the fourth quarter over the past 20 years. That compares to a combined 1.2% rise in the first three quarters of the year. Last year, the Dow soared an incredible 10.2% in the fourth quarter. The S&P 500’s performance is equally impressive: the index has posted an average gain of 3.95% in the fourth quarter since 1950. In 2020, the S&P 500 surged nearly 11% in the fourth quarter.
Essentially, what happens in the fall is that consumers cheer up as the holidays approach. When we gather with family and friends during Thanksgiving and the other holidays, consumer sentiment naturally rises. This year, there could even be more holiday cheer during Thanksgiving and the Christmas season, with crowds filling football stadiums and folks able to visit families again.
All of this bodes well for the stock market. When consumer sentiment rises, investor sentiment also improves, which is why year-end rallies are common.
Additionally, there is a lot of year-end pension funding that typically starts around the Thanksgiving holiday, which includes gift purchases for others around Christmas, and then it carries over into the New Year.
Simply put, the final months of the year should be very strong ones for the stock market—and this year-end strength will likely serve as a launching pad for 2022.
A Fourth Quarter to Remember
In the words of Gary Alexander, a Senior Writer at Navellier & Associates, “The fourth quarter—like the conclusion of sporting events or Broadway plays—is where the drama lies. Similarly, the third quarter is where the doldrums occur, making the fourth-quarter’s performance all the more refreshing.”
Well, the stunning start to the fourth quarter has certainly been refreshing, as October kicked off the final quarter of the year on the right foot. In fact, despite all the stock market’s fluctuations—remember all those wild, triple-digit swings on the Dow in early October?—the broader indices all trekked higher. The S&P 500, Dow, and NASDAQ all ended the month of October up more than 5%.
The fact is the fourth quarter commenced with another spectacular earnings season. According to FactSet, the S&P 500 posted average earnings growth of 30% and average sales growth of 15.1% for the third quarter. Equally impressive, 80% of companies topped analysts’ earnings estimates for the quarter, with an average earnings surprise of 14.7%. I should also add that 83% of S&P 500 companies exceeded analysts’ sales forecasts. 
Now, aside from the stunning third-quarter results that ignited stocks in the first month of the fourth quarter, this year has something else going for it. But I’m getting ahead of myself. First, consider the table below with all the numbers for the S&P 500 fourth quarters in the last 20 years—and then I’ll let Alexander explain what makes this year so special.
The stellar fourth-quarter performance of the stock market over the last 20 years is all the more amazing since it includes controversial election years like 2000 (Gore vs. Bush), 2008 (Obama vs. McCain during the financial crisis and deep market crash), and 2016 (Clinton vs. Trump), the controversial 2020 election just past, as well as the 24% market drop in the fourth quarter of 2018. That’s a lot of bad fourth quarters.Look at those numbers above again and tell me one thing they all had in common…
(Hint: Were they even or odd?)
Here’s where the numbers begin to taste better. In years divided by four, we hold Presidential elections. Most of the last six such elections have been highly controversial, causing a disturbed stock market in their wake. In the other even-numbered years, we hold Congressional elections, where every House seat is up for grabs as well as one third of Senate seats, often resulting in a repudiation of the President’s Party.
As a result, the even-numbered fourth quarters since 2000 have averaged tiny (0.6%) gains, while the odd-numbered fourth quarters averaged gains of nearly 7%. The last time I checked 2021 is… odd. In the 11 election years, the fourth quarter rose seven times and fell four times for a net average gain of just 0.6%. In contrast, the fourth quarter S&P performance in the last 10 years ending in odd numbers—non-election years—averaged +6.75% with only one small drop, making odd-numbered years about 11 times better than election years in this century.
That makes me feel better about entering this final quarter.
The Stock Trader’s Almanac has also supported Alexander’s outlook that the fourth quarter of 2021 will be a spectacular one for the stock market. Since 1950, the S&P 500 has posted average gains of about +3.95% in the fourth quarter. To put this into perspective, the S&P 500 climbed an average of +4.64% in the first nine months of the year during the same time period.
Clearly, we’re in the midst of the seasonally strong time of year—and there’s one bucket of stocks I expect will exhibit tremendous relative strength in the upcoming months, especially since the near-term market lows are in…
Stock Market Bottoms; Growth Back in Favor
After the bumpy summer months and a dismal September, the stock market surged on the first trading day of the fourth quarter and put in a firm bottom in the early part of October. How can we be certain?
Let’s consider research from the September 28 article by Jason Bodner, who writes Sector Spotlight in the Navellier & Associates weekly Marketmail and who is anticipating that the stock market will continue to climb higher.
First, what we need to understand is that the S&P 500 is cap weighted. It assigns more importance to bigger stocks. The top five stocks (1%) are worth more than $9.3 trillion (23%) out of the SPDR S&P 500 ETF Trust’s (SPY) total market cap of about $40 trillion.
The cap weighted method doesn’t work so well in terms of assigning importance to wealthy persons. If we asked the founders of these companies—Jeff Bezos, Bill Gates, Jeff Zuckerberg, Sergei Brin, and the late Steve Jobs—their opinions on political issues, would we give their answers 23% of the weight of all votes in America? We don’t weight political votes by wealth, so why weight stocks by wealth. That’s why, on a data level, I look at a larger number of smaller companies—the Russell 2000 Index (IWM).
The comparison of the S&P 500 and the Russell index clearly tells us money has been moving into the biggest stocks, and not necessarily into the rest of the market. So why then am I bullish?
Well, recently we had an ETF dump. When selling in ETFs hits a high level, market troughs are often put in near-term. I put prior instances in orange boxes. Notice the two most recent times (thin orange lines):
Graphs are for illustrative purposes only. Please read important disclosures at the end of this commentary.
To me, this indicates near-term lows are in.
Bodner went on to discuss how we experienced significant selling in industrials and large-cap stocks as fears spread that China’s economic growth was slamming on the brakes. Uncertainty over China’s real estate behemoth, Evergrande, and the threat of its default also led to more selling than buying at the end of September.
But all the selling on Monday, September 21 (43%) accounted for the bulk of the selling that entire week, so it was potentially a “one and done” instance.
And what was being bought in the wake of this sell-off had all of us at Navellier & Associates very excited: high-quality growth stocks—those that had both superior sales growth and were profitable—were being bought hand over fist. In other words, there is a strong demand for quality.
In Bodner’s words, “I’m very familiar with many of these stocks and have not seen buy signals on these names for many months. Suddenly, they are getting scooped up. Such a bid for quality is bullish. Bull runs are often sparked to life when leaders lead higher. I am excited to see buying in stocks like these.”
The conclusion we can draw?
A flight to quality is underway—and growth stocks should lead the market higher in the fourth quarter and beyond.
The Next Roaring ‘20s
Now, I know what you’re thinking. Earnings momentum slowed down drastically in the third quarter—why will growth stocks lead the market going forward?
First, you’re not wrong. The S&P 500’s earnings momentum has tapped the brakes. For the first quarter, the S&P 500 averaged 52% average earnings growth, and for the second quarter, the S&P 500 posted 91% average earnings growth. Both represented record earnings growth for S&P 500 companies.
But the third-quarter’s average 30% earnings growth is nothing to sneeze at. In fact, it still represents the third-best earnings growth since the third quarter of 2010.
The Negative Nellies, of course, would disagree. They would have you believe that earnings momentum has stalled, that growth stocks are dead in the water, and that the stock market is heading for a tumble.
But here’s what they’re missing (ignoring!): The S&P 500 is expected to achieve more than 20% average earnings growth in the fourth quarter, and that’s up from estimates for 18.1% just three months ago.
In addition, calendar year 2021 earnings growth is anticipated to average more than 40%. And while fiscal year 2022 earnings momentum is forecast to tap the brakes a bit, the S&P 500 is still expected to report 9.5% average earnings growth. 
earnings growth numbers like that, I think it’s unwise to bet against growth stocks.
But don’t just take my word for it. In his October 12 article, Bodner revealed why we may be heading into what could be considered the next Roaring ‘20s…
In my best Biden voice, let me say: “Here’s the deal!” I think we are heading into the next Roaring ’20s. The last major pandemic was the 1917–1919 Spanish flu. Then came a sharp, short recession and market crash. We emerged into a boom in the economy and rising personal wealth.
Currently, we are emerging from lockdown, economic hampering, supply-chain disruptions, and pent-up demand. I believe we’re on the cusp of a similar boom. In the 1920s, the Dow Jones Industrial Average was the equivalent of the NASDAQ today. It was filled with new industrial companies.
Today, we think of the Dow industrials as boring stocks. But back then, they were the growth engines.
Think of all those companies suddenly producing cars, radios, and airplanes – great new stuff! These new toys and tools were the technology growth companies of the time.
Today, we have the Nasdaq Composite Index. It’s loaded with tech-heavy companies and has been the growth engine for stocks for years now. For example, almost anything you touch, look at, ride, or use today is packed with tech, like semiconductors, software, and other electronic components.
Many wonder how it can continue… but I wonder how it can’t.
Just look at the chart below, showing the Dow Jones from January 1921 until December 1925 next to the Nasdaq from October 2015 until now.Each period was 60 months… and each period rallied about 115%.
Graphs are for illustrative purposes only. Please read important disclosures at the end of this commentary.
Pretty amazing right? What’s shocking is that the Dow Jones went on to rally another 150% in the following four years. Will history repeat itself?
I believe so. I don’t think stocks will crash – they will dash. And growth will lead the way.
The reality is that the rising tide will no longer lift all boats. With the S&P 500’s earnings momentum slowing down in the fourth quarter and continuing to dip heading into fiscal year 2022, institutional and individual investors alike are growing more and more selective. In other words, they’re focusing on fundamentally superior stocks—stocks that are able to maintain accelerating earnings and sales momentum in a slowing earnings environment.
It’s an environment where growth stocks prosper immensely—and it’s an environment where the Navellier custom portfolio solutions thrive.
Prepare Now to Be Another 30% Higher by Memorial Day 2022
My fascination with growth stocks started back in the late 1970s during my college years at Cal State Hayward. I wanted to uncover how to beat the market without taking on too much risk—and what I discovered was that a select group of stocks can consistently outperform the S&P 500: stocks with superior fundamentals. Today, I’m a self-proclaimed “number guys” because the numbers do not lie—and right now, the numbers are telling me that fundamentally superior stocks could appreciate as much as 30% by Memorial Day 2022. Let me break it down for you…
Here at Navellier & Associates, we believe in the power of a well-balanced portfolio. It can literally neutralize the stock market’s uncertainty, protect your retirement, and take advantage of unique growth opportunities the market throws our way. That’s why we encourage our clients to take a diversified approach to managing their investments—one that can include growth, income, and capital preservation strategies. Some of our most-popular custom portfolios are our growth portfolios. So, let’s start there because they are a good example of why the stock market could steadily rise in the upcoming months.
These portfolios feature companies that are committed to growing their sales and earnings. Our growth portfolios are segmented by market capitalization, are actively managed, and seek inefficiently priced growth stocks with opportunities for long-term price appreciation.
Take our Large Cap Growth portfolio for example. This portfolio is characterized by about 57% average earnings growth and nearly 47% average sales growth. It’s important to note that our portfolios do not go up as much as forecasted sales and earnings due to P/E compression. However, these stocks typically appreciate up to 60% of their underlying earnings growth.
Considering that, when you take 0.60 times 57% average earnings growth, it equates to 34% appreciation. Are you starting to see why the stock market could rise another 30% by Memorial Day?
These offerings provide dividend growth and income opportunities with capital appreciation. At Navellier, our dividend and income portfolios strive for portfolio growth through securities with capital appreciation, strong dividend growth, and income opportunities. Take our Power Dividend portfolio for example. This portfolio is characterized by about 19% average sales growth and 59% average earnings growth. Using the same formula as the one utilized above to the Large Cap Growth portfolio… 0.60 times 59% average earnings growth, it equates to 35% appreciation.
Capital Preservation/Defensive Portfolios
These portfolios aim to outperform up markets and limit losses in declining markets by moving to cash or bonds. This asset allocation plan allows investors to play defense in a declining market.
Our Defensive Alpha portfolio, as an example, aims to provide clients with an asset allocation that combines stocks and cash. Its ultimate goal is help protect a portfolio’s value during prolonged market downturns.
When you add up everything we have discussed today, you can quickly see the importance of having a diversified approach to managing your investments—one that can include growth, income, and capital preservation strategies. The power of a well-balanced portfolio cannot be overstated.
When you dive deeper into the details of our exclusive portfolios and strategies, you will see that many of them cross boundaries and can be combined to form an overall portfolio strategy. That portfolio can then be customized to your personal financial goals and risk tolerance.
To build a personal portfolio that strives to deliver returns, it is important to think about things such as your retirement goals, how long you have to reach those goals, and what your risk tolerance is… just to name a few.
At Navellier & Associates, our team is here for you. We will work with you to answer these questions and discuss a customized solution tailored specifically towards you and your retirement goals.
Right now, we have a very bullish outlook for the remainder of 2021 and well into 2022. As we just discussed, growth stocks have returned to favor, and the stock market could appreciate another 30% by Memorial Day 2022. We can help you build a personal portfolio that will prosper in this environment.
In fact, here’s a sneak peek at how we select stocks for each of our custom portfolio offerings…
Our Proprietary 3-Step Stock Selection Process
At Navellier & Associates, our system was built to find inefficiency in the market, uncover what we think are the market’s best growth stocks, and utilize a disciplined quantitative and fundamental analysis system to create a customized portfolio for individual investors.
Consider an example of the three-step proprietary stock-selection process that we utilize for most portfolios:
- Quantitative Analysis: Using our proprietary screening process, we measure reward (alpha) and risk (standard deviation) indicators to the appropriate market capitalization range for each portfolio. We rank stocks based on the reward/risk measure and reduce the initial investment universe to a select bucket of stocks that fall into the upper percentiles of the reward/risk measure.
- Fundamental Analysis: We then apply fundamental variable screens to the stocks with the highest reward/risk measures. This shines the spotlight on which companies have exceptional profit margins, excellent earnings growth (and positive earnings surprise potential!), and reasonable price/earnings ratios (based on expected future earnings).
- Securities Optimization: We use a proprietary optimization model to maximize alpha, while minimizing portfolio standard deviation. This can efficiently allocate the stocks and create portfolios that are well diversified across sectors and industries.
Primarily, our goal with the three-step stock selection process is to develop portfolios that have a low correlation to their benchmarks, increasing diversification, decreasing risk, and maximizing profits for investors like you.
The year of 2021 is quickly winding down. The stock market is narrowing, investors are growing more selective, and growth stocks are returning to favor. So, we believe that now could be a good time for you to have a custom investment strategy that focuses on your financial goals and risk tolerance, as well as diversification.
Navellier & Associates can help you build your own customized portfolio strategy. We rely on our extensive research, trend analysis, customized strategies, and historic market knowledge to manage our client-only portfolios and help our clients take advantage of opportunities that are presented by market corrections—short and long-term—as well as raging bull market situations.
Our proprietary models are built to work on U.S.-based portfolios with a minimum account value of $250,000. If your portfolio meets these criteria, please contact my Navellier & Associates team. They are standing by ready to discuss your personal portfolio and investment strategy to help you make the most of the final weeks of 2021, as well as prepare for 2022.
Schedule Your Portfolio Review Today
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If you decide you’d like to continue to manage things yourself, we hope that we gave you some important information to consider during your portfolio review.
We are not here to simply preach to you, but rather share information that we have gained from our extensive market research and analysis. We also want to know about you so that we can make the right suggestions for your personal situation. CLICK here now to schedule your no-obligation portfolio review.
I’m confident that Navellier & Associates can help guide you to build a portfolio to navigate the current environment and help you achieve your individual financial goals in 2022.
All the best to you and yours,
Chief Investment Officer
Navellier & Associates, Inc. Private Client Group