Getting Ready For The Next Leg Up
Pullbacks are nothing ominous in a bull market, but just a pause before the next uptrend. Don't worry if you've missed out on the all-time highs so fa...
With the market pulling back from their recent highs, now’s the time to start getting ready for the next leg up.
After heady gains this year, the market was ripe for a pullback. And it seems like we’re finally getting it.
For perspective though, we also got one back in mid-February through early March.
Stocks had gotten off to a strong start, then suddenly turned around.
Panic set in for some investors as they braced for more downside. Some sold. Others shorted. And some refused to buy this market for fear of it going lower.
But then it didn’t.
And since then (the last couple of weeks notwithstanding), all of the major indexes have powered on to new all-time highs.
If you missed out on this latest rally due to disbelief, or fear, it’s not too late.
Because after this pullback, it looks like there’s a lot more upside to go.
There was nothing ominous in the pullback we saw earlier in the year.
It was just your normal, ordinary pullback.
Every bull market has them.
In fact, stocks usually pull back about -5% roughly 3-4 times per year. (A pullback is defined as a decline between -5% and -9.99%.) And that’s pretty much what we saw from the Dow which pulled back -4.57% during that time, and the S&P which pulled back by -5.75%.
And stocks usually correct -10% on average about once a year. (A decline of -10% to -19.99% is called a correction.) That’s what the Nasdaq did back then with a correction of -12.04%.
But these are the pauses that refresh before the next leg up.
And from those March lows, the Dow then surged by more than 16%, the S&P by 22%, and the Nasdaq by 28%.
Now the markets are at it again.
From the recent highs, the Dow has pulled back by -3.6%, the S&P by -4.2%, and the Nasdaq by -5.8%.
After shaking the tree, it will be exciting to see how high the market can go next time.
While pullbacks are never fun when they’re happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.
New Highs Beget Higher Highs
For some reason, people seem reluctant to buy stocks after making new highs. I suppose they may feel like they missed the move, or that now stocks have more room to fall.
But statistically, this is just not true.
For one, the S&P, for example, has made 60 new high this year alone.
Can you imagine all of the money you would have left on the table if you were afraid to get into stocks making new highs?
But second, and more importantly, studies have shown that stocks making new highs have a tendency of making even higher highs.
In fact, using S&P price data going all the way back to the 1950’s, it shows that stocks typically go up in the subsequent six months following new all-time highs.
This means that stocks making new highs aren’t at any greater risk of going down. Quite the contrary, there’s a higher probability of stocks going up even further!
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Climbing the Wall of Worry
Inflation concerns continue to grip the market.
And some worry that if inflation gets too hot, the Fed might have to raise interest rates sooner rather than later.
But let’s remember that some inflation is good. Not too much, but some. And one person’s cost increase is another person’s profit.
It’s also important to know that stocks typically perform well in inflationary environments.
That’s why the Fed has a target of 2%, and not 0%. In fact, over the last several years, the Fed is on record as being more concerned over low inflation than high inflation.
And that’s why they are now willing to let it run hotter than normal, for longer than normal, before doing anything on rates. (Although, it looks like they will begin their bond buying taper by year’s end, and the market cheered the news when announced.)
It’s true that inflation is too hot right now. And that’s in large part due to supply disruptions, worker shortages, and base effects (comparing current prices to last year’s pandemic-subdued numbers).
But these are considered transitory. And the aforementioned problems should start seeing some relief, especially as the enhanced unemployment benefits, which came to an end in early September, will force many workers to rejoin the labor force, thus reducing the supply shortages and worker shortages, while simultaneously helping to ease inflation.
In fact, the Fed has reduced inflation expectations for 2022 and 2023, putting it at 2.1%.
Let’s also remember that inflation, in and of itself, doesn’t tank economies. High interest rates do.
But the prospect of ‘high’ interest rates is literally years and years down the road.
Record Low Interest Rates Are Here To Stay For Some Time
As you know, the Fed has injected trillions of dollars of monetary stimulus into the economy through their bond buying, various liquidity measures, and record low interest rates.
They have repeatedly pledged to do whatever it takes to support the economy, and get back to full employment.
And in doing so, they have constantly reiterated that they plan to keep interest rates near zero for the foreseeable future. That means at least through the rest of this year. And at the earliest, rates aren’t expected to budge until sometime next year. But it’s more likely that rates don’t begin to move up until sometime in 2023.
Even when they do begin to raise rates, they are essentially starting from zero. And it should be noted that over the last 50 years, there’s never been a recession (aside from last year’s pandemic-induced plunge), when the Fed Funds rate was under 4%.
And at quarter-point moves (even half-point moves), it would take years to get to that level.
Bullish Economic Growth
In the meantime, the market has been focusing on the historic economic growth.
With the Fed projecting their full-year GDP forecast at 5.9%, which would be the fastest growth rate in 37 years, it’s easy to see why stocks have been going up.
Then add in the unprecedented fiscal stimulus that has already been approved by Congress, not to mention the infrastructure package, and other domestic spending bills that are likely on the way in the near offing, and the economy looks set to soar.
Add all that up, coupled with the reopening of the economy, and we’re about to see a record amount of pent-up economic demand meet a record amount of stimulus money.
And that’s a recipe for explosive economic growth and stock market gains.
That’s also why people are expecting this to be the beginning of a multiyear boom.
In fact, as Jamie Dimon said in his annual letter to shareholders earlier this year; “this boom could easily run into 2023 because all the spending could extend well into 2023.”
History In The Making
What we’re seeing right now is history in the making.
And historic times typically lead to historic price gains.
So you need to make sure you’re taking full advantage of it.
And not squandering this opportunity with preventable mistakes.
If you ever wished you could have traded historic times in the market differently, now is your chance.
Because the next historic run-up could be just around the corner.
And the time to get ready for it is now.
Do What Works
So how do you fully take advantage of this historic opportunity?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 26 of the last 32 years with an average annual return of 25.4% per year? That's more than 2x the S&P. But when doing this year after year, that can add up to a lot more than just double the returns.
And did you also 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’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So the next step is to get that list down to a smaller, actionable list of stocks that you can buy.
Stock Picking Secrets of the Pros
One of the best ways of getting into the best stocks is to see what stocks the pros, who use these methods, are picking.
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, ETF’s, 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 and strategies that work, from experts who have demonstrated their ability to beat the market.
The best part about these strategies and stock picks is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade.
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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 before this weekend's deadline.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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