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Don't Miss Out On The Next Leg Up In The Market

·11 min read

So, stocks are back on the upswing (yesterday notwithstanding).

After bottoming in mid-June, all of the indexes went on an impressive run.

Within two short months, the Dow gained 14.1%, the S&P was up 17.4%, the small-cap Russell 2000 rallied 22.5%, and the Nasdaq gained 23.3%.

Then profit taking set in, and those gains were trimmed by more than half.

But stocks are back on the rise, and it looks like there’s a lot more upside to go.

After a dismal start in the first half of the year, the second half is looking quite promising.

In fact, 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.

And so far, it looks like we could very well be heading in that direction.

So What Changed?

For one, the recession of 2022 appears to have come and gone.

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%.

And 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.)

In fact, Q3 GDP is expected to come in at 1.3%.

Moreover, oil prices have fallen sharply. After trading over $130 a barrel, crude oil is now trading at $86. That’s a decline of more than -30% in a matter of months. And that’s helped ease inflation concerns as well.

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% respectively.

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.

That also means the Fed may not have to raise rates as much as people had previously feared.

More . . .

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Is A “Soft Landing” Still Possible?

All week long, last week, a parade of Fed officials, including Fed Chair Jerome Powell, remarked how the Fed was committed to tackling inflation.

And the market cheered the news.

Simply put, high inflation is far worse for the economy than higher interest rates.

Earlier in the year, many doubted the Fed’s resolve. But after two back-to-back 75 basis point hikes (225 basis points in all, so far, in 2022), and continuous reassurances that they will “keep at it until the job is done,” the market is finally starting to believe it.

Currently, the market has placed a 90% chance of another 75 basis point hike when they meet again on September 20-21.

With the midpoint for the Fed Funds rate currently at 2.38%, another 75 bps would put the midpoint at 3.13%.

And with the Fed previously saying they see the target rate getting to 3-3.5% by year’s end, and other members recently saying they see it getting above 4% by early next year, they still have more to go.

But inflation expectations have simultaneously been going down. And with each interest rate hike, inflation expectations, and inflation itself, should continue to decline as well.

A few months ago, many were expecting inflation to soar above 10% or more. Now it’s closer to 8%, with expectations for it falling to 5-6% next year, with the core rate falling even lower.

Fears that interest rates would need to climb above the inflation rate had people in a panic, especially when inflation was expected to soar to 10%.

But with it expected to moderate to the 5% range, interest rate expectations have moderated as well. Both of which are bullish.

And Mr. Powell’s stated goal of achieving a “soft landing” is still possible.

The Forecast Is For Growth

Let’s also not forget that valuations are down.

In fact, the P/E ratio for the S&P is trading below its five-year average.

And that makes stocks a bargain.

Of course, if earnings drift lower, valuations will become higher. 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 bottomed and began their spectacular 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 remined 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 made in the market.

You just have to know what to look for to take full advantage of it.

Do What Works

So how do you fully take advantage of the market right now?

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 28 of the last 34 years (an 82% win ratio) with an average annual return of 25% per year? That's more than 2 x the S&P. And consistently beating the market year after year can add up to a lot more than just two times 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 the best 5-10 stocks that you can buy.

Proven Profitable Strategies

Picking the best stocks is a lot easier when there’s a proven, profitable method 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.

Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.

Here are a few of my favorite strategies that have regularly crushed the market year after year.

New Highs: As mentioned earlier, 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 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 43.2% vs. the S&P’s 7.5%, which is 5.7 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 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 50.4%, beating the market by 6.7 x the returns.

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 22 years (2000 through 2021), using a 1-week rebalance, the average annual return has been 51.2%, which is 6.8 x the market.

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. 

Where To Start

There’s a simple way to add a big performance advantage for your stock-picking success. 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 up to +48.2%, +67.6% and even +95.3% in 2021.¹

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.

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Thanks and good trading,

Kevin

Zacks Executive VP Kevin Matras is responsible for all of 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.

¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.




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