MARKETS SPECTATOR: End-of-year rally?

September's traditional equities pullback is nowhere to be seen, raising the prospect of a sustained, hefty rally to year end driven by investors fearful of missing out.

There’s an interesting situation playing out in the domestic market at the moment, as well as overseas. Equity markets around the globe have had a pretty decent run of late as expectations of QE3 and ECB stimulus, which ultimately proved correct drove markets higher. For the quarter-to-date the local benchmark is up 7.7 per cent while the S&P 500 has added 7.2 per cent.

Historically, September has been one of the worst months for global equities; since 1990 the average return during September for the S&P 500 is -0.6 per cent. However, this year seems to be different, probably because of the huge stimulus plans announced. Month-to-date the S&P 500 has added 3.8 per cent while a gain of 2.2 per cent for the S&P/ASX 200 index has been logged.

So what does this mean? Given all the concerns in the market, and there are plenty, there’s a lot of cash sitting on the sideline, seemingly waiting for the clouds of concern to lift. This means that many market participants have been underweight equities and missed out on the strong recent performance.

So now we have a situation where there is money looking to come into equity markets. Professionally money doesn’t like chasing prices higher, but rather stepping in and buying stocks on the pullback. The big issue now is that the usual September pullback hasn’t occurred!

So there are two possible scenarios: firstly, the markets pull back in October or secondly, that it doesn’t occur at all.

If the first scenario plays out then we would expect the pullback would be shallow and well supported as sidelined funds look to enter on the dip. However, if the second scenario plays out then the impact may be more noticeable. If sidelined money doesn’t get an opportunity to enter on a pullback then we may see some just buying at current levels. This would obviously push the market higher and could trigger a bigger rally into year-end driven by FOMO, or the ‘fear of missing out’.