Investors are worried about valuations. And they are concerned about whether the Trump team and the GOP-controlled Congress can get meaningful legislation launched like tax cuts and deregulation.
But if you look at the real, underlying drivers of the current stock market rally, you'll see that Washington games don't matter so much anymore. The Wall Street investment game has a lot more going for it than any politician or policy can match.
Tax cuts and deregulation will merely be the match that lights the bonfire.
Here are the top 3 drivers of new highs you need to focus on so that you won't be left behind wondering and wandering in doubt...
When it comes to investing success, it always pays to begin with the economy, earnings, and interest rates. All three of these core fundamentals are very favorable to continued stock market highs.
The economy has been chugging along slowly under 2% GDP growth for over 5 years. There have been several occasions when it looked like "stall speed" had been breached and we would roll over into recession.
But instead, the combination of growth-generative forces like household formation, consumer spending, small business expansion and job creation, commercial real estate and corporate capital investment all fueled the next quarter back to 2% and even 3% growth. Low interest rates helped a lot, but they were not the whole story.
At Zacks we are fanatically focused on the most important fundamental driver for stocks: earnings. And I'll admit, I was worried about the earnings recession of 2015 and 2016 -- which saw 5 quarters of negative growth -- taking the stock market down hard.
It didn't happen because the drivers of the profit drought were particular to the energy and commodity sectors. And there was a broad-based positive catalyst infecting all sectors that overpowered the mere price effect of "stuff from the ground."
More . . .
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That broad-based positive catalyst is technological innovation, fueled primarily by the ever-powerful and ever-shrinking semiconductor. Despite unavoidable recessions and financial crises, it has always been technology that drives the economic engine of progress and productivity.
In fact, it was precisely innovation in oil & gas exploration and production that brought about the commodity recession by making extraction so darn efficient and competitive. That is "creative destruction" at its finest as a force of economic growth and dynamism.
And look at who survived the so-called earnings recession like it wasn't even there: the semiconductor industry, the cloud/big data companies, the smartphone and tablet makers, the ecommerce facilitators, the machine vision/learning, automation, and AI leaders.
This is why the Technology sector continues to lead the market higher -- because that's where the most organic earnings growth is coming from, expanding TAM (Total Addressable Market) "pies" everywhere with new products, features, solutions, and even brand new markets altogether.
And don't forget the human genetic sciences that are opening up vast new territories in health and disease research. Your odds of getting some form of cancer in your lifetime are 1 in 2. Be glad that hundreds of emerging biotech companies are being funded by investors and big pharma brands to discover breakthroughs in the exciting field of immuno-oncology, which will reduce the need for radiation, chemo, and some surgeries.
3) Investor Behavior
The third driver of an advance in stocks that will take the S&P 500 to 2,500 and beyond this year is the global investment machinery that controls tens of trillions in wealth. Where does that wealth seek to grow? The best place on the planet is still in equities.
My top two rules or "secrets" of Wall Street are "They Have to Buy" and "They Don't Have to Sell." This is the mandate of hundreds of mutual funds, pension funds, insurance companies, endowments, and hedge funds. The billions of dollars in fresh investor and retirement savings that hit their books every quarter must be put to work.
And when these managers crunch the fundamental numbers in their models, including economic trends, earnings estimates, and interest rates they see one clear signal: stay invested for the long-run and buy every pullback. This is especially true -- and painful -- if they are watching the S&P index, their benchmark, run away from them.
That's why you will continue to see panic buying on every new high and on every 2% dip this year. This dynamic makes this market a dream-come-true to trade where your screens of fundamentally bullish stocks can be filtered through multiple technical indicators for precise buying opportunities.
Will the stock market double in 5 years? Who can say for sure?
But one thing is for sure: professional investors have the fundamental and innovation tailwinds at their backs and they would be very foolish not to err on the side of the market advancing at least 50% in the next 5 years. That's what I am doing now.
Taking Advantage of This Market Opportunity
If you want to make the most of what the market is giving us with precisely timed trades, and also believe in the potency of the Zacks Rank, here's some good news:
We're combining two successful approaches to achieve the Best of Both Worlds. I am directing a portfolio service called TAZR, Technical Analysis + Zacks Rank.
Of course, you can uncover some of these enhanced trades on your own if you start with 880 Zacks Rank #1 and #2 stocks. There's no better fundamental indicator of what and when to buy. Then cull down the list to an investable few by adding technical signals for even greater accuracy and timeliness.
Sounds simple but it does take more than a few chart setups to catch the right trades at the right times. That's where TAZR comes in.
Our goal is to land double-digit wins in a matter of weeks, and you are welcome to join us. But don't wait to get more details.
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Kevin, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for Zacks TAZR.
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