The bull market, one of the longest in history, had showed no signs of slowing last month. But within 4 short weeks, the coronavirus stopped it in its tracks.
The World Health Organization finally labeled the outbreak a pandemic last week. Interestingly, previous pandemics did not create such an economic disruption in the global economy. But with trade and supply chains so interconnected, and with the unprecedented containment response from countries and individuals that have impacted the flow of people, goods, and ultimately commerce, the economy has taken a hit.
For perspective, this is the fastest we’ve ever seen a bull market turn into a bear.
Let me also say that while bear markets typically coincide with recessions, that’s not always the case.
And this one might be another example of that.
Recession or not, the pain is real right now.
But it’s important to remember that our economy is strong, with 50-year low unemployment, 20-year high in household income, near record high in consumer confidence, and near record lows in interest rates.
It’s clear there’s going to be a negative economic impact. And nobody yet knows how severe it will be. But the U.S. was arguably in one of its strongest economic positions prior to this, which makes it all the more likely that we will bounce back in record time.
Nonetheless, the longer these disruptions last, the greater the impact will be.
In the meantime, the U.S. government is preparing several packages of aid and stimulus measures. That includes $50 billion in small business loans. And a proposal to send checks to those hardest hit by the crisis due to the closing of stores, restaurants, and other businesses as these temporary social distancing measures are enacted.
The Fed also swiftly cut interest rates twice already for a combined 150-basis point rate cut, bringing rates to near zero, while also injecting $1.5 trillion into our financial system to expand liquidity, and buying $700 billion worth of treasuries and mortgage-backed securities.
More . . .
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So what now?
Let’s look at a few stats. The top 10 worst bear markets (using the Dow) following the Great Depression shows that it declines on average by -39.27%. And it lasts on average of 16.9 months.
The biggest bear market in that study was the last one (10/2007-3/2009) during the housing/financial crisis. It was dubbed the Great Recession and the market plunged by -54.43%. But it’s worth noting that our economy and financial system back then were on pretty shaky ground. A starkly different situation compared to now.
But while we’re drawing contrasts, we don’t yet know how this health scare will compare either.
Nonetheless, the Dow at its worst so far was down -35.98%, the S&P was down by -32.29%, and the Nasdaq was down by -31.61%.
Not that far from the average. Although, there is a way to go to the worst case study.
But the rallies that followed have been even bigger. Within a year after a bear market, stocks surge on average of 44.74%. And go on to gain on average 66.34% by year 3.
BTW, following the Great Recession, the market gained 63.40% in year 1; 100.58% by year 3; 153.58% by year 5; and more than 357% during the entire 11+ year bull market.
Anyway, there could very well be more downside.
But now is the time to start building your list of dream stocks.
You don’t have to go all in at once. But you can start taking nibbles.
And definitely open your mind to new stocks you may never have even heard of before.
Some of the tried and true will continue to be tried and true.
But this virus outbreak, and the upheavals it’s brought about for businesses and consumers, will usher in plenty of new and exciting opportunities in the inevitable bull market that follows.
So start putting your list together. And keep your eyes and ears open for the new winners you may not even know about yet.
Do What Works
The best way to find the new market leaders is to stick with time-tested methods that work.
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 24.5% per year? That's nearly 2.5 x the S&P with an annual win ratio of more than 81%.
That includes 2 bear markets and 3 recessions.
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 achieving your investment goals.
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 the best 5-10 stocks that you can buy.
Proven Profitable Strategies
Picking the best stocks is a lot easier when you focus on proven, profitable strategies to do it.
And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.
Here are a few of my favorite strategies that have regularly crushed the market year after year, in both good times and bad.
New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 47.8% vs. the S&P’s 6.0%, which is nearly 8 x the market.
Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.1%, which is 9 x the market.
Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.7%, beating the market by 9.2.x the returns.
The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.
Roadmap to Success
Nobody likes bear markets. But they can provide tremendous opportunity for getting into great stocks at fantastic prices.
Some may be tempted to tune out during these tough times. Don’t do it.
Now’s the time to stay engaged. That’s how you’ll stay ahead of the market.
There’s no need to reinvent the wheel. The path has already been created. Now it’s just about doing it.
And there’s never been a better time to find tomorrow’s winners today.
So make sure you take full advantage of it.
Where to Start
There's a simple way to prepare yourself to add a big performance advantage for stock-picking success when the market goes back up. It's called the Zacks Method for Trading: Home Study Course.
With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.
Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.
You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.
You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles. The best of these strategies produced gains of +118.0%, +175.7%, and even +186.7% from 2017 through 2019.
The course will also help you create and test your own stock-picking strategies.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
Please note: Copies of the book are limited and your opportunity to get one free ends midnight Saturday, March 21, unless we run out of books first. If you're interested, I encourage you to check this out now.
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Thanks and good trading,
Zacks Executive VP Kevin Matras is responsible for all our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.
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