The stock market is entering the most volatile month of an election year - but the rally may be here to stay

By Isabel Wang

Nine of the S&P 500's 11 sectors have risen in the fourth quarter of election years since 1992, says CFRA Research

Wall Street is about to flip its calendar to the most volatile month of a presidential election year, but the record-setting rally seen in the third quarter has investors pondering whether the big gains have staying power.

History shows that a positive stock-market performance in September during election years since 1945 has led to a gain in the following October nearly 80% of the time, compared with the typical frequency of just 61% across all years, according to Sam Stovall, chief investment officer at CFRA Research.

What's more, while the third quarter of all years since 1945 has seen the S&P 500 SPX post a gain less than 60% of the time, the benchmark index has registered a gain in the fourth quarter 80% of the time, Stovall said in a Monday client note (see table below).

"Factors that may continue to propel this market [in the fourth quarter] include China's recent stimulus program, the ongoing easing in U.S. inflation readings as the personal-consumption expenditures [index] for August recorded another downtick in growth, and the likelihood of two more Federal Reserve interest-rate cuts totaling 50 to 75 basis points," Stovall wrote.

See: It was a September to remember for stocks - but October presents fresh challenges for the rally

In September, U.S. stocks had a rough start to what is historically the weakest month for the stock market, but rebounded after the Fed cut its policy rate for the first time in four years and after China unveiled a massive stimulus package to arrest a slowdown in the world's second-largest economy.

As a result, the S&P 500 and the Dow Jones Industrial Average DJIA each surged around 2% this month to post their best September performance since 2019. The Nasdaq Composite COMP was up 2.7%, meanwhile, and logged its best September since 2013, according to FactSet data.

For the quarter, the S&P 500 and the Nasdaq advanced 5.5% and 2.6%, respectively, with both scoring their fourth consecutive quarter of gains - the longest such stretch since 2021. The Dow also booked its best quarter since late 2023 and up 8.2%, according to Dow Jones Market data.

How stock sectors tend to perform in the fourth quarter of election years

A broadening rally in U.S. stocks has also offered an encouraging signal to investors worried about stock-market performance in the final quarter of 2024, Stovall said.

"Participation remains favorable" as the S&P 500's advance in the third quarter has been "accompanied by gains in stocks of all sizes, styles, and 10 of 11 sectors," Stovall wrote.

The S&P 500's utilities XX:SP500.55, real-estate XX:SP500.60 and industrials XX:SP500.20 sectors were the top performers among the large-cap benchmark index's 11 sectors this quarter, while the energy sector XX:SP500.10 was the only corner suffering quarterly losses, according to FactSet data.

The table below shows that nine of the S&P 500's 11 sectors have typically risen in the fourth quarter of election years since 1992, "possibly due to the lifting of uncertainty once the election was over," said Stovall.

See: Powell says U.S. economy is in 'solid shape' and the Fed intends to keep it that way

U.S. stocks on Monday eked out modest gains in the final trading session of the month. The Dow ended nearly flat, at around 42,330, while the S&P 500 and the Nasdaq were up around 0.4%, according to FactSet data.

-Isabel Wang

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09-30-24 1627ET

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