Stocks sizzle in best September since 1939, but will it last?

By Adam Shell, USA TODAY

NEW YORK — After the best September for stocks in more than 70 years, can the market mojo continue in the months ahead?

After a jump of almost 9% for the U.S. market in September — historically the worst month for stocks — investors are trying to make sense of an unpredictable market that has seen massive swings amid conflicting signals on the economy.

In August, the market fell nearly 5%, as rising fears of an economic relapse, or double dip, and of a bout of 1930s-style deflation, spooked investors and sparked heavy selling. But instead of the negative mood taking root, September turned out to be the mirror image of the summer doldrums.

A few key catalysts turned deeply pessimistic investors into believers again. One by one, key economic data points — ranging from real estate to retail sales, factory activity to employment — started coming in a tad better than expected. That was critical, as it removed the double-dip scenario, allowing investors to focus on better days ahead.

The more upbeat economic news also cleared up uncertainty that was paralyzing investors.


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"Investor clarity went from 3D to 20/20," says Sam Stovall, chief investment officer at Standard & Poor's. The 3D he refers to is the lethal combination of "double dip and deflation." But those fears have faded — at least for now. "Yes, economic growth will be slow, what we dub a 'half-speed recovery.' But not a double dip," Stovall adds.

Investors were also emboldened by a Federal Reserve statement last week suggesting that the central bank is ready to boost the economy again, if it stumbles, with a second round of purchases of U.S. Treasury bonds, a strategy known as quantitative easing. That strategy is intended to keep interest rates low, which helps stimulate economic activity.

The market's ability to stay above a prior low price level, or floor, then rise above a level that was viewed as a ceiling also provided a boost.

While some Wall Street pros say the economy is not yet out of the woods and that current stock prices are pricing in a too-rosy scenario, there are also some signals that point to stocks going higher.

Stocks have fared well in both October and the fourth quarter after an up September, Bespoke Investment Group data show. Going back to 1939, stocks average gains of 5.5% the final three months of the year and have been up 80% of the time.

The midterm election is also being viewed as bullish, as investors believe there will be more investor- and business-friendly policies if Republicans win control of the House of Representatives.

"You don't want to give up on the fourth quarter," says Justin Walters, an analyst at Bespoke.

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