Stocks rallied during the week and posted additional gains on Friday in spite of mixed messages coming from Washington. Stocks had their best week in three months, as the market shrugged off the president's COVID-19 infection. Riskier stocks performed very well but blue chips were not far behind. On Friday, the Dow Jones Industrial Average gained 161 points, or 0.6%. The S&P 500 increased 0.9% and the Nasdaq Composite rallied 1.4% on the day. For the full week, the Dow was up 3.3%, the S&P 500 was up 3.8%, and the Nasdaq was up 4.6%. For the year-to-date, the DJIA is up 0.2%, the S&P is up 7.6%, and the Nasdaq is up 29.1%. Over the past 52 weeks, the Dow is up 6.6%, the S&P 500 is up 17.1%, and the Nasdaq is up 43.7%.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

In theory, investors can breathe easier heading into the fourth quarter, when markets typically post the strongest returns of the year. We analyzed data collected on S&P 500 performance from 1980-2020. By our calculations, the 4Q has generated average gains of 4.2%, compared to gains of 2.1%, 3.1% and 0.5% for 1Q, 2Q and 3Q, respectively. And the fourth quarter is consistent as well, with a "win percentage" of 80%. That means that 4Q stock returns are positive four years out of five, and compares to winning percentages of 66% in 1Q, 66% in 2Q and 63% in 3Q. To be sure, the 4Q has posted its share of clunkers. In 1987, which included Black Friday, stocks fell 23% during the period; in 2008, they sold off 18%, after the collapse of Lehman Brothers and as the U.S. economy plunged into a deep recession. As recently as 2018, stocks slid 14% in the final quarter as trade wars deepened and the Fed raised rates. This time around, it is not unreasonable to expect volatility, given the pandemic, recession and election. The fourth quarter of election years historically has been in the red. We recommend clients focus on quality companies with clean balance sheets and experienced management teams.

Stocks fell on Tuesday morning, giving back some of Monday's gains as investors awaited the first presidential debate. On the economic front, the Commerce Department said that the U.S. trade deficit in goods rose 3.5% to $82.9 billion in August, reflecting strong imports of consumer goods and slower growth in exports. The increased deficit could weigh on 3Q GDP. Meanwhile, the Conference Board reported that its consumer confidence index rose to 101.8 in September, up from 86.3 in August and well above the Reuters consensus forecast of 89.5. The Dow fell 0.5%, the S&P 0.4%, and the Nasdaq 0.1%. Crude oil traded near $39 per barrel, while gold rose $10 to $1892 per ounce.

Our rating on the Consumer Discretionary sector is Over-Weight. Many employees are splitting time between work and home, and we expect efforts to refresh the home space to continue. Consumer Discretionary niches including housing and retail have been strong, and we look for this strength to extend to the recovering auto industry going forward. The sector accounts for approximately 11% of the S&P 500. We think investors should consider allocating 13%-14% of diversified portfolios to the group. The following are the Consumer Discretionary picks we use in our model portfolios and our Focus List.

After Monday's bullish intraday reversal and relative strength from prior leaders, Tuesday followed through with strength from the leaders of just a few weeks ago. Consumer Discretionary (XLY) rose 2.2%, aided by heavily weighted AMZN (22%), which spiked 5.6%. This was AMZN's biggest day in over two months. Communications Services (XLC) climbed 2%, led by FB and GOOGL -- which each rose over 2%. Not to be left out, Technology (XLK) gained 1.6%, led by gains in AAPL and MSFT. Could everything be right with the stock market once again?

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Jim typically adds three or four new stocks per month. Below are the latest additions, all of which carry and Argus BUY rating.

This edition features the upcoming U.S. election and its impact on the healthcare system; restaurant optimism for 2021 (is it justified?); the continuing tech war between China and the U.S.; and notes from Adobe, Apple, and Lennar.

Often overlooked amid the market's gyrations, dividend income is an important element of total return. Consider recent results: in 2015, the S&P 500 delivered a total return of 1.4%, including dividends -- but excluding dividends, the market was down 0.7%. Capital gains were a bit easier to achieve in 2016-17, though we note that dividend payments still contributed about 15%-20% of total return for investors. And dividend payments softened the blow in 2018, when most market indices declined as the Federal Reserve hiked rates. Between 1930 and 2012, dividend income accounted for 42% of total return of the S&P 500, according to Morgan Stanley. Not all dividends are created equal, though, and it is important to understand the difference between high-yield stocks and dividend-growth stocks, particularly in a slow-growth or recessionary economic environment.

Stocks were mixed on Friday, finishing off a punctuated week that saw all major indexes decline. Riskier equities were hit the hardest, with the prior week's tech sell-off continuing into the 9/8/20 trading week. On Friday, the Dow Jones Industrial Average gained 131 points, or 0.4%. The S&P 500 was roughly flat and the Nasdaq Composite was down 0.6%. For the full week, the Dow was down 1.7%, the S&P 500 was down 2.5% and the Nasdaq was down 4.1%. Year-to-date, the DJIA is down 3.1%, the S&P is up 3.4%, and the Nasdaq is up 21.0%. Over the past 52 weeks, the Dow is up 1.6%, the S&P 500 is up 11.1%, and the Nasdaq is up 32.7%.

The Dangers of a K-Shaped Recovery

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Texas Instruments Inc. (TXN); Dominos Pizza Inc (DPZ); Citizens Financial Group Inc (CFG); AGNC Investment Corp (AGNC) and the Focus List deletions are Allstate Corp (The) (ALL); Advanced Micro Devices Inc. (AMD); Equinix Inc (EQIX); CarMax Inc (KMX).