What a year it’s been so far.
The Dow, which had eluded an official bear market call all year, finally dipped into bear market territory earlier this week by closing below the -20% threshold. From their all-time high close in January to their lowest close they have fallen by -20.8%. Although, after Wednesday’s rally, they are now down ‘only’ -19.3%.
The S&P has been in a bear market since June. But then it went on a 17.4% rally over the next month and a half. However, it turned around and started heading back down just as quickly. They are currently down by -22.5% from their all-time high close.
The Nasdaq and the Russell 2000 were the first ones to enter a bear market (March and February respectively). But they were also the first ones to exit their bear market (first part of August), and technically enter a new bull market when they finished 20% above their bear market low close. From their lowest close, they rebounded as much as 23.3% and 22.5%.
Since then, however, they’ve both fallen back down. As strange as it sounds, they are technically still in their new bull market as the Nasdaq is ‘only’ down -15.8% from their recent bull market high close, and the Russell is ‘only’ down -15.1% from their recent bull market high close. But from their all-time high closes, they are down in total by -31.2% and -29.7%. As I said, strange. And for those keeping track, they both stayed above their June lows and their June low closes.
But I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.
This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.
But in the second half of 1970, the S&P was up 27%.
Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.
In either case, you should be ready.
So What Changed?
After Q1’s GDP shrank by -1.6%, traders were expecting the worst, predicting a deep recession was coming.
But Q2 was ‘only’ down by -0.6%.
All the while, consumer demand remained strong. So did corporate earnings. And the jobs market stayed sizzling hot.
Suddenly, the worst-case scenario no longer looked like it was going to happen.
Forecasts for the second half were calling for growth. (It’s no longer a recession when the economy starts growing again.)
While Q3 GDP is only expected to eke out a 0.3% gain, Q4 is expected to be better, with full year estimates showing another year of growth. And the Fed is predicting 2023 to be even better still with a 1.8% GDP growth rate.
Moreover, oil prices have fallen sharply. After trading over $130 a barrel, crude oil is now trading at $82. That’s a decline of -37% in a matter of months. And that’s helped ease inflation concerns.
Peak Inflation Is Behind Us
Inflation still remains near 40-year highs.
But inflation has been ticking down for the last few months.
Headline inflation, according to the Consumer Price Index (CPI), is at 8.3% y/y, with core inflation (less food & energy) at 6.3%. That’s down from its peak of 9.1% and 6.5%.
While that dip is not a lot, and it’s a far cry from the Fed’s goal of getting it back down to 2%, the mere fact that it’s no longer making new highs, and instead is ticking lower, is a step in the right direction.
A few months ago, many were expecting inflation to soar above 10% or more. Now, expectations are for it falling to 5-6% next year, with the core rate falling even lower.
And that means the Fed may not have to raise rates as much as people are fearing.
More . . .
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Is A “Soft Landing” Still Possible?
At last week’s FOMC announcement, the Fed raised rates by another 75 basis points, as expected.
What caught the market by surprise, however, was the forecast that rates might need to get as high as 4.40% by year’s end (vs. previous expectations for 3.5%). And hit 4.60% in 2023 (vs. 4.25% expected previously), before holding it there for a while.
With the Fed Funds midpoint now at 3.13%, that means another 1.25% hike by the end of the year, followed by an additional 25 basis points next year.
Nonetheless, the Fed said they will continue to look at the data. And will take each meeting as it comes.
And while the prospect of a ‘soft landing’ becomes more difficult the longer inflation stays elevated, and the higher interest rates go, the Fed has done it before.
With plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely the chance that the market is being too pessimistic.
You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But this year, the GDI was positive all year with a 1.6% annualized growth rate for the first part of the year, while GDP was down an annualized -1.1%.
Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.
And that’s bullish.
Are Stocks Undervalued?
Let’s also not forget that valuations are down.
The P/E ratio for the S&P is at multiyear lows, and is trading below its five-year average.
And that makes stocks a bargain.
Of course, if earnings drift lower, valuations will creep up. But there’s plenty of room for stocks to remain relatively cheap.
And the earnings outlook is still forecasting growth.
Add in another trillion dollars in stimulus between the CHIPS Act and the Inflation Reduction Act, and that should extend the growth outlook even further.
But, What If...?
To be fair, the economy has its problems.
Some are still calling for a recession (even though we already had it).
And who can forget Jamie Dimon’s call for an “economic hurricane?” (Although, within weeks of that statement, stocks began their spectacular summer rebound.)
But Jamie Dimon, earlier this year, also said that he thinks the U.S. is headed for the best economic growth in decades, and that the “consumer balance sheet has never been in better shape.”
So, he’s definitely putting out some mixed messaging.
But that’s why big announcements like this all have to be taken with a grain of salt – both the bullish ones and bearish ones.
I’m not dismissing the possibility of problems down the road.
But his ominous ‘hurricane’ statement instantly reminded me of the ‘irrational exuberance’ line from Fed Chair, Alan Greenspan, back on December 5th, 1996.
From the time of that speech, the S&P gained over 105% before peaking on March 24th, 2000 (more than 3¼ years later).
Just imagine all of the money someone would have missed out on if they had jumped ship the moment he made that comment.
The point is, these kinds of big announcements have terrible track records.
And I definitely wouldn’t trade on it.
Watch The Jobs Numbers
One of these days, maybe next year, maybe a few years from now, the economy will crack.
But one of the telltale signs will be a drop in new jobs.
When that happens, you can start wondering when the other shoe will drop.
Until then, there’s plenty of money to be made in the market.
You just have to know what to look for to take full advantage of it.
Now Is The Time To Start Building Your Dream Portfolio
With stocks near their lows, now is the time to start building your dream portfolio.
As legendary investor Warren Buffett once said, “be greedy when others are fearful.”
And there’s plenty of fear in the market right now.
But it should also be known that a large part of any market recovery typically comes at the very beginning.
Whether that’s now, next week, or next month, etc., we’re definitely much closer to the bottom than we were just a few short weeks or months ago.
To increase your odds of getting in at the bottom, you should always be scanning for new stocks to get into.
True, when the market is falling, and economic conditions weaken, there will be fewer stocks coming through your screens. That’s just the way it is.
But there will always be great stocks coming through. And savvy investors who diligently stay engaged in the market, even when times are tougher, will find those gems when others have given up.
And since you are doing this regularly, you won’t miss out when the market turns around. Of course, they won’t all be winners. You may get into a new stock that goes down. But that’s OK. If you keep your losses small, you won’t do any damage to your portfolio.
But you will inevitably find yourself in some spectacular picks at precisely the right time.
And if you don’t think there’s money to be made during tough times like these, just know that YTD, even though the major indexes are all down, there are 689 stocks that are by 10% or more; 495 that are up by 20% or more; 213 up by 50% or more, and 85 that are up by 100% or more.
Increasing Your Odds Of Success
That’s not to say picking winning stocks doesn’t require skill. Because it does.
If you keep looking at the wrong things to pick stocks with, you’ll rarely if ever get into the winners.
But picking winning stocks is easier than you think.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years with an average annual return of 25% per year? That's more than 2 x the S&P with an annual win ratio of more than 82%.
That includes 3 bear markets and 4 recessions.
And did you know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you still have to narrow that list down to the handful of stocks you can buy at any one time.
And that’s where the professional expertise of our editors comes in.
One of the best ways to begin picking better stocks is to see what the pros are doing – the pros who use these methods to select the best stocks to buy.
Whether you’re a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.
This applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between.
Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods that work, from experts who have demonstrated their ability to beat the market.
The best part about these strategies is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start getting into better stocks on your very next trade.
The Easiest, Fastest Way to Get Started
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It names and explains 4 stocks with strong fundamentals that are hand-picked by our experts to have the biggest upsides for Q4.
And despite inflation there couldn’t be a better time to get aboard. Stocks are substantially undervalued, but the U.S. economy is much better than most people realize, with strong consumer demand, robust job market and solid corporate earnings.
In particular, these 4 stocks are riding trends that could prove very lucrative for investors...
Stock #1: It’s one of the world’s most influential tech stocks, but most investors have never heard of it. Revenue jumped 44% thanks to extreme demand for its products from other tech companies like Apple.
Stock #2: This cutting-edge entertainment company is ready to break out. Shares are already climbing after a pullback earlier in the year, and with EPS estimates up 25% in the last 30 days, big gains are on the horizon.
Stock #3: An under-the-radar alternative energy company is poised to leap into the headlines. Analysts are calling for a massive 70% in topline growth – and government stimulus could push revenues even higher.
Stock #4: The surging electric vehicle industry will give this chemical company a major boost. With operations on 5 continents, it could become a dominant supplier of materials for a new generation of EV batteries.
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Thanks and good trading,
Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks’ newly released Ultimate Four Special Report.
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