Political risk is not limited to the United States. In addition to pre-Brexit planning in the United Kingdom over the next several months, the Italian constitutional referendum in late December has the potential to force a leadership change and hamper already lackluster economic growth in that country.
The upcoming Federal Reserve (Fed) policy meetings will also drive markets during the fourth quarter. We believe a rate hike may be unlikely just before the election at the November 2, 2016 Fed policy meeting. We see a hike as likely at the December 14, 2016 meeting, although it is possible that European banking fears, a policy mistake at home or abroad, a sharp deterioration in the U.S. economic data, a flare-up of China’s bad debt problem, etc. may provide cover for the Fed to hold off. Global central banks will also garner attention: the Bank of Japan meets on November 1, 2016 and December 20, 2016; the European Central Bank meets on December 8, 2016; and the Bank of England on December 14, 2016.
Finally, optimism is widespread ahead of the OPEC meeting on November 30, 2016, following the verbal commitment from members to agree to production cuts to help support prices. Odds favor a deal and we expect oil prices to potentially move higher in the intermediate term, although the risk that the deal falls apart could create a bump in the road.
Conclusion
The fourth quarter is historically strong for equities. Although we are looking for equities to end the year with mid-single-digit gains,* leaving them about where they are right now, the potential for more gains is always possible. A large sell-off during a fourth quarter that isn’t related to a recession is very rare; however, that does not mean stock market gains will come easily. As we continue to await the outcome of the U.S. presidential election and the key central bank meetings, we can expect continued volatility for the rest of the year.
Burt White is chief investment officer for LPL Financial.
Thanks to David Tonaszuck for contributing to this report.