The following is an excerpt from Zacks Chief Strategist John Blank’s full Feb Market Strategy report To access the full PDF, click here
This month, the hot stock strategy topic was obvious: the sudden sell-off in U.S. stocks.
In light of that, I took a deep dive. I looked into the anatomy of both Bear and Bull markets, and the interregnums to stock market upside.
The latter are more commonly called ‘Corrections’…
I. U.S. Market Update — The Anatomy of Corrections
From 1929 to 2017, First Trust found—
· The average Bull Market period lasted 9.0 years with an average cumulative total return of +480%.
· The average Bear Market period lasted 1.4 years with an average cumulative loss of -41%.
· So the U.S. has an expansion underway of 105 months length. That’s 8.75 years. Stocks are up +295% to February 6th, 2018 (from S&P500 683 to 2695)
· There have been three corrections in the S&P500 --so far-- during the current bull market.
o In 2010 (-16.0% lasting 69 days).
o In 2011 (-19.4% lasting 154 days), and
o In 2012 (-9.9% lasting 59 days).
Now, consider this equity strategist research…
Strategas Research technical analysts studied the years since 1945 when there were shallow drawdowns of -6% or less. They found 9 instances. In 2017, the S&P's biggest sell-off was less than -3%, and the index was up about +22% for the year.
In the years with shallow sell-offs of -6% or smaller, including 2017, the S&P mostly saw strong double-digit gains, averaging about +25. The drawdowns averaged about -4%.
In the following year, the S&P500 mostly saw a larger drawdown, averaging about -12%, but ranging between -6% and -26%.
The S&P's returns performance in the following year was mixed, averaging a +5% gain — the same level forecast for 2018 by Zacks Buy-side Chief Investment Officers polled in late January 2018.
This history implies stocks in 2018 look set for further annual returns, albeit much less than last year (around +5%?). But there's good reason to believe 2018 would bring a full-throttle correction (-10% decline), after 2017 shallow sell-off and low volatility.
Indeed! A -7.5% 2018 correction already happened in early February. However, the three previous corrections in this cycle lasted 2 months, twice, and 5 months once.
The insights? There could be volatile downside trading for weeks! Or this was not this year’s “big one.” That correction comes later. This was merely a prelude.
II. Zacks Sector/Industry/Company Telescope
February Zacks sector and industry ranks showed us. A very strong and successful earnings season is well underway.
The strong earnings season can be seen in the number (5 of 10) of Very Attractive sectors. It is based on strong global tailwinds. We also see an earnings estimate pickup from Trump corporate and personal tax cuts.
Very Attractive sectors this month: Info Tech, Industrials, Financials, Energy and Materials. Energy, Materials, andInfo Tech see the strongest global tailwinds.
Industrials run hot on Transportation, Aerospace and Machinery investment (a follow through on a +11.4% rise in Business Investment in Q4). Financials are the biggest benefactor of lower domestic corporate profit taxes and rising rates.
Falling sectors: Telcos and Utilities. These are the usual deep defensives.
(1) Info Tech stays HOT and Very Attractive. Semi-conductors stay as a top niche again in February. Misc. Tech is a new hot Tech industry to watch.
Top Stock Pick: Lam Research (LRCX - Free Report)
(2) Industrials move to Very Attractive from Attractive. The numerous industry leaders are: Airlines, Aerospace, Construction-Building Services, Railroads, Metal Fabricating and Machinery.
Top Stock Pick: H&E Equipment (HEES - Free Report)
(3) Financials get to Very Attractive from Attractive, another monthly ascent. The strong spots are Banks & Thrifts, Investment Banking, and Finance, once again.
Top Stock Pick: Farmer’s National Banc Corp. (FMNB - Free Report)
(4) Energy moves to Very Attractive from Attractive. Oil & Gas Integrated, Coal, Oil Misc. and Oil E&P lead. Notably, and a future sign, Drillers are unattractive.
(5) Materials rise to Very Attractive from Market Weight. The leaders are Chemicals and Paper.
(6) Consumer Discretionary falls to Attractive. Leaders are Home Furnishing-Appliance and Publishing.
(7) Health Care rises to Attractive from Market Weight. The very clear leader now is Medical Care.
(8) Consumer Staples rises back to Market Weight. The best industries are Consumer Staples-Misc. and Food/Drug retail.
(9) Telco Services are Very Unattractive.
(10) Utilities are Very Unattractive.