After the stock market, as measured by the S&P 500, finished the first three quarters of 2022 down 25%, investors are probably skeptical of putting money to work right now. After all, the thinking might be to wait until stocks bottom out and start rising again before investing in the market. Plus, there's a lot of uncertainty with the economy right now that complicates the picture.
Is the S&P 500, an index of the 500 largest companies in the U.S., poised for a bull run in the fourth quarter? That is, can it rise at least 20% to finish out the year? Let's take a closer look.
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Looking at past data
No investor wants to see that the value of their portfolio dropped by 25% through the first nine months of the year, but that's exactly how the S&P 500 performed. And now, the question is whether or not things can turn around as we finish off 2022.
History is no guarantee of future results, but looking at past data can provide some insights. From 2012 through 2021, the S&P 500 produced a positive Q4 return in eight of those 10 years. And the average fourth-quarter return was 5.1%. The two years that had a negative Q4 return were 2012 (down just 0.38%) and 2018 (down 13.5%).
Besides this year, the S&P 500 also posted a negative return through the first three quarters in only one year, 2015. And in that year, the Q4 return was 7%. All of this supports an argument for a more favorable finish to 2022 for the market.
Consider the macroeconomic situation
However, the current economic situation makes things a bit more complicated. For most of the past decade, the Federal Reserve instituted a loose monetary policy, with low interest rates and quantitative easing, in order to spur economic growth following the Great Recession. And this has generally supported higher stock prices.
However, things are different now. Unprecedented levels of monetary and fiscal stimulus to help propel the economy out of the pandemic slump has resulted in inflation that's at 40-year highs. And the result is a tighter stance by the central bank, which has aggressively raised interest rates throughout 2022. The economy is slowing, businesses are laying off workers, and financial experts are predicting a recession for the U.S. economy in the not-too-distant future.
This puts pressure on asset prices, especially those on the risky end of the spectrum, a category that stocks belong in. If the economy is headed for a downturn, why would investors be inclined to put their hard-earned savings in the stock market? There's no doubt that economic uncertainty is very high right now, but I don't think this should deter investors.
What should investors do?
Let's be completely clear about one thing. I don't think anyone has the foresight to accurately predict with any level of confidence what the stock market will do in any given month, quarter, or even year. There are just too many variables involved that can affect stock prices in the short term, despite what historical data tells us.
The good news for investors is that the market tends to go up over time. In fact, over the past 20 years, the S&P 500 has produced an average annual return of close to 10%. This means that investors who can adopt a long-term approach should do well over time.
Setting aside some money, no matter how seemingly small the amount, and putting it into an index fund like the Vanguard S&P 500 ETF (VOO -0.41%) on a monthly or quarterly basis is a good strategy. This is called dollar-cost averaging, a low-stress plan that allows investors to avoid trying to time the market (a losing proposition) by constantly buying stocks no matter what the economy is doing.
The S&P 500 might go up, down, or end the fourth quarter essentially flat. That shouldn't dissuade investors from remaining optimistic and continuing to invest for the long term.
