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Markets Attempt to Rebound from Correction: Here's What to Do
A round of cooler-than-expected inflation reports last week provided investors with a bit of a reprieve from the recent volatility, as the S&P 500 posted back-to-back gains for the first time since its February peak.
The index is looking to distance itself further from correction territory. But as we’ve seen this week, fears are lingering in a sign that market participants remain concerned about tariffs and broader economic weakness.
From a historical perspective, US stocks have experienced (on average) 3 pullbacks of 5% per year, 1 correction of 10% per year, and a deeper correction of around 15% every 3 years. Many individual stocks remain oversold. When viewing the historical statistics, one could make the argument that the worst of this correction may be behind us.
But that doesn’t necessarily mean we should load up and get aggressive here. Volatility is likely to remain elevated. Putting in a true bottom during corrections (and bear markets) is typically a process, not a one-time event. It will take some time for stocks to work their way sustainably higher, so we don’t have to be in any rush to significantly increase exposure.
The truth is that there’s no way to know how severe this correction will become. Just like every pullback doesn’t evolve into a correction, every correction doesn’t evolve into a bear market. But every bear market starts as a pullback (followed by a correction), so having a gameplan as the selling worsens is crucial.
Mixed Economic Data Paints a Cloudy Picture
The four trading days ahead are littered with relevant economic figures and events, including the culmination of the Fed’s rate decision on Wednesday.
Last week’s data from the Bureau of Labor Statistics showed there were 7.74 million jobs open at the end of January, an increase from the 7.51 million seen in December. Jobless claims continue to hover near historic lows as well, signaling underlying resilience in the labor market.
On the inflation front, the Bureau also reported that “core” CPI, which strips out volatile food and energy components, rose 3.1% in February, down from the 3.3% seen in January. This marked the lowest annual increase in the core CPI since April 2021.
Headline CPI rose less than expected as well. Prices increased 2.8% on an annual basis in February, a slowdown from the 3% annual gain in January.
Wholesale prices followed suit. The producer price index rose 3.2% on an annual basis, below the 3.3% consensus estimate. Core wholesale prices rose 3.4% year-over-year, also coming in below expectations.
Markets grappled with fears of an economic slowdown amid weak data on Monday, as US retail sales increased less than expected in February. Retail sales were up 0.2% on the month, far lower than the expected 0.6% rise.
All eyes remain on the Fed, which is set to begin its two-day policy meeting on Tuesday. The FOMC will almost certainly keep rates steady for the time being, but all eyes will be on any updates to the dot plot along with Powell’s commentary.
How to Identify Market Leaders
Many individual stocks have now lost all of their post-election gains (and then some). This is not what we’d like to see, but we also need to remember that many leading stocks were overly extended heading into this year. A ‘reset’ was needed to remove some of the froth.
In order to beat the market, we need to own stocks that are outperforming the market. It sounds so simple, but most investors are so caught up with their favorite stocks and fail to separate the wheat from the chaff.
It’s very important to stay abreast of market conditions and leading sectors. So far this year, health care, energy and utilities are leading the way, while tech and consumer discretionary stocks take a back seat. With every year comes a different market theme; it’s our job to identify that theme as early as possible and position our portfolios to benefit from it.
With the market pulling back, keeping tabs on which industry groups are outperforming can help guide investors to top individual stocks. The Zacks Securities and Exchanges industry group is ranked in the top 23% of all Zacks Ranked Industries. As such, we expect this industry to outperform the market over the next 3-6 months, just as it has so far this year:
Image Source: Zacks Investment Research
Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on the stocks within the top 50% of Zacks Ranked Industries, investors can dramatically improve their stock-picking success.
One leading stock within this industry is CME Group (CME - Free Report) , the world’s leading and most diverse derivatives marketplace. CME Group operates contract markets for the trading of futures and options worldwide. The company offers derivatives products based on interest rates, equities, foreign exchange, commodities, and fixed income through its electronic trading platforms.
The exchange boasts a strong market position driven by its diverse product line and numerous strategic alliances. Fundamental growth remains a key driver for the company’s operating leverage, as CME leads with about 90% market share of global futures trading and clearing services.
A Zacks Rank #2 (Buy) stock, CME has managed to sidestep this year’s volatility with a nearly 15% gain:
Image Source: StockCharts
CME Group has exceeded earnings estimates in each of the past 17 quarters. Analysts covering CME have upped their current-quarter EPS estimates by 1.56% in the past 60 days. The Zacks Consensus Estimate now stands at $2.61 per share, translating to growth of 4.4% relative to the year-ago period.
Image Source: Zacks Investment Research
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season.
The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year back test.
CME Group is a Zacks Rank #2 (Buy) and boasts a +0.64% Earnings ESP. Another beat may be in the cards when the company reports Q1 results on April 23rd.
Final Thoughts
There’s a long way to go before we can confidently say the worst of this correction is behind us. But the major indexes remain oversold; a snap-back rally could occur at any time.
Still, even if we have seen a bottom, volatility is likely to remain elevated in the short-term. It’s best to target top groups and stocks, rather than attempt to catch a falling knife in some of the more beaten down areas.
Make sure to take advantage of all that Zacks has to offer to uncover leading stocks like CME.
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Markets Attempt to Rebound from Correction: Here's What to Do
A round of cooler-than-expected inflation reports last week provided investors with a bit of a reprieve from the recent volatility, as the S&P 500 posted back-to-back gains for the first time since its February peak.
The index is looking to distance itself further from correction territory. But as we’ve seen this week, fears are lingering in a sign that market participants remain concerned about tariffs and broader economic weakness.
From a historical perspective, US stocks have experienced (on average) 3 pullbacks of 5% per year, 1 correction of 10% per year, and a deeper correction of around 15% every 3 years. Many individual stocks remain oversold. When viewing the historical statistics, one could make the argument that the worst of this correction may be behind us.
But that doesn’t necessarily mean we should load up and get aggressive here. Volatility is likely to remain elevated. Putting in a true bottom during corrections (and bear markets) is typically a process, not a one-time event. It will take some time for stocks to work their way sustainably higher, so we don’t have to be in any rush to significantly increase exposure.
The truth is that there’s no way to know how severe this correction will become. Just like every pullback doesn’t evolve into a correction, every correction doesn’t evolve into a bear market. But every bear market starts as a pullback (followed by a correction), so having a gameplan as the selling worsens is crucial.
Mixed Economic Data Paints a Cloudy Picture
The four trading days ahead are littered with relevant economic figures and events, including the culmination of the Fed’s rate decision on Wednesday.
Last week’s data from the Bureau of Labor Statistics showed there were 7.74 million jobs open at the end of January, an increase from the 7.51 million seen in December. Jobless claims continue to hover near historic lows as well, signaling underlying resilience in the labor market.
On the inflation front, the Bureau also reported that “core” CPI, which strips out volatile food and energy components, rose 3.1% in February, down from the 3.3% seen in January. This marked the lowest annual increase in the core CPI since April 2021.
Headline CPI rose less than expected as well. Prices increased 2.8% on an annual basis in February, a slowdown from the 3% annual gain in January.
Wholesale prices followed suit. The producer price index rose 3.2% on an annual basis, below the 3.3% consensus estimate. Core wholesale prices rose 3.4% year-over-year, also coming in below expectations.
Markets grappled with fears of an economic slowdown amid weak data on Monday, as US retail sales increased less than expected in February. Retail sales were up 0.2% on the month, far lower than the expected 0.6% rise.
All eyes remain on the Fed, which is set to begin its two-day policy meeting on Tuesday. The FOMC will almost certainly keep rates steady for the time being, but all eyes will be on any updates to the dot plot along with Powell’s commentary.
How to Identify Market Leaders
Many individual stocks have now lost all of their post-election gains (and then some). This is not what we’d like to see, but we also need to remember that many leading stocks were overly extended heading into this year. A ‘reset’ was needed to remove some of the froth.
In order to beat the market, we need to own stocks that are outperforming the market. It sounds so simple, but most investors are so caught up with their favorite stocks and fail to separate the wheat from the chaff.
It’s very important to stay abreast of market conditions and leading sectors. So far this year, health care, energy and utilities are leading the way, while tech and consumer discretionary stocks take a back seat. With every year comes a different market theme; it’s our job to identify that theme as early as possible and position our portfolios to benefit from it.
With the market pulling back, keeping tabs on which industry groups are outperforming can help guide investors to top individual stocks. The Zacks Securities and Exchanges industry group is ranked in the top 23% of all Zacks Ranked Industries. As such, we expect this industry to outperform the market over the next 3-6 months, just as it has so far this year:
Image Source: Zacks Investment Research
Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on the stocks within the top 50% of Zacks Ranked Industries, investors can dramatically improve their stock-picking success.
One leading stock within this industry is CME Group (CME - Free Report) , the world’s leading and most diverse derivatives marketplace. CME Group operates contract markets for the trading of futures and options worldwide. The company offers derivatives products based on interest rates, equities, foreign exchange, commodities, and fixed income through its electronic trading platforms.
The exchange boasts a strong market position driven by its diverse product line and numerous strategic alliances. Fundamental growth remains a key driver for the company’s operating leverage, as CME leads with about 90% market share of global futures trading and clearing services.
A Zacks Rank #2 (Buy) stock, CME has managed to sidestep this year’s volatility with a nearly 15% gain:
Image Source: StockCharts
CME Group has exceeded earnings estimates in each of the past 17 quarters. Analysts covering CME have upped their current-quarter EPS estimates by 1.56% in the past 60 days. The Zacks Consensus Estimate now stands at $2.61 per share, translating to growth of 4.4% relative to the year-ago period.
Image Source: Zacks Investment Research
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season.
The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year back test.
CME Group is a Zacks Rank #2 (Buy) and boasts a +0.64% Earnings ESP. Another beat may be in the cards when the company reports Q1 results on April 23rd.
Final Thoughts
There’s a long way to go before we can confidently say the worst of this correction is behind us. But the major indexes remain oversold; a snap-back rally could occur at any time.
Still, even if we have seen a bottom, volatility is likely to remain elevated in the short-term. It’s best to target top groups and stocks, rather than attempt to catch a falling knife in some of the more beaten down areas.
Make sure to take advantage of all that Zacks has to offer to uncover leading stocks like CME.