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How to Trade this Economic Recovery (Bumps and All)

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Over the last several months, stocks have been on a tear.

Since the pandemic low close in late March, the Dow has surged by more than 48%, the S&P by 45%, and the Nasdaq by 56%!

It’s been a record-setting move.

But the best part is that it looks like there’s a lot more upside to go.

History has shown that after bear markets end, the bull market rallies that follow are nothing short of spectacular.

Following the previous bear market of 2007-2009 (during the housing/financial crisis, aka the Great Recession), the market (Dow) gained 63.4% in year 1; 100.6% by year 3; 153.6% by year 5; and more than 357% during the entire 11+ year bull market.

And with many analysts calling for an ‘unprecedented’ second half recovery, the gains are poised to be even bigger this time.

More . . .


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As the national reopening continues to expand, Zacks’ EVP Kevin Matras expects the economy and stock market to reach new highs as pent-up consumer demand is unleashed. Top analysts also anticipate unprecedented growth for the rest of the year along with record-setting growth again in 2021.

The key is knowing where to find the stocks that will lead the market. 

Today, Kevin is making his hardcover book, Finding #1 Stocks, available to you for free. In it, he shares his best stock-picking secrets, including the exact formulas for strategies that produced gains up to +122.2%, +153.0%, and even +156.8% from 2017 through Q2 2020.

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Then and Now

The difference between previous bear markets, and the one that just ended, is that they are typically preceded by a slowing economy. But this one came about due to an unforeseen exogenous event -- the coronavirus.

Prior to the outbreak, the U.S. economy was considered to be the strongest of our lifetime with 50-year low unemployment, 20-year high in household income, near record high consumer confidence, and record high corporate profits.

Yet in an effort to slow/stop the spread of the virus, businesses were temporarily shut, people were kept inside, and the country was put on lockdown, which artificially suppressed economic activity.

Rather than a typical recession, this will be remembered as the ‘Great Suppression’.

But that’s over. And now the economy is reopening.

All 50 states have reopened in some shape or form. Some faster than others.

The rise in coronavirus cases has created some setbacks, and forced some cities to impose new restrictions on bars and indoor dining places. But the reopening continues, bumps and all. And we’re seeing huge pent-up economic demand being unleashed.

You can see that in last month’s Employment Situation Report which showed 4.8 million jobs gained vs. 3.0 million jobs expected. And that comes on the heels of the previous Employment Report which showed 2.7 million jobs gained vs. expectations for -7.7 million jobs lost.

The stronger than expected recovery is also being underscored by the latest Retail Sales Report which jumped 17.7% for the biggest monthly gain ever; and the Housing Market Index which surged 56.8%, also the biggest monthly gain ever.

Additionally, mortgage demand has climbed to an 11-year high; Factory Orders are up 8%; and the ISM Manufacturing and PMI Manufacturing numbers are up even more, increasing by 22.0% and 25.1% respectively.

And that’s just for starters.

Q3 GDP is expected to rise by an unprecedented 20%, with another double-digit gain in Q4.

And GDP for all of 2021 is expected to grow by 5% (the largest annual GDP growth rate in 38 years)!

This is why stocks are soaring. And why they should continue to do so.

Helping Hand 

Another reason why analysts are calling for an unprecedented economic recovery is because of the unprecedented aid that has been made available to businesses and workers.

So far, nearly $10 trillion in fiscal and monetary stimulus has been pumped into the economy.

And it looks like there could be another stimulus package on the way.

Congress is currently working on another $1.5 trillion relief/stimulus bill that could get done by month’s end. 

Let’s also not forget that the Fed slashed interest rates to near zero. And it doesn’t look like those are going to go up anytime soon. That’s bullish for both businesses and consumers as it keeps more money in people’s pockets, increases everybody’s purchasing power, giving them more money to spend.   

Given all of the above, that’s why Fed Chair, Jerome Powell, said the economic recovery can be “robust” once the economy reopens, and that the current job losses are just temporary due to the virus. 

All sentiments many market watchers share.

Riding the Bull 

We all knew once the pullback was over that a new bull market was inevitable. History has proven that.

But the speed of this bull market has caught many off guard.

And the gains keep racking up.

But not all stocks are created equal. And there will be distinct winners and losers in the subsequent rallies to come.

Of course, there are the obvious. In the winner’s column you’ve got online shopping companies, home delivery, telecommuting and videoconferencing software, etc.

In the loser’s column you’ve got airlines, hotels, brick and mortar retail, and more.

But there are less obvious picks and pans.

Those with the best balance sheets and cash flows will fare the best.

But restaurants, for example, are likely to only return to 75% of their previous levels. And it will likely take the rest of the year to do it as social distancing cuts into their seating capacity, and new restrictions in some areas further complicate their plans.

Companies in the Medical Sector should do well. Especially those focused on coronavirus testing, therapeutics and vaccines. Abbott Labs, for example, came out with a new test kit that’s expected to add $1 billion in sales. Gilead has seen promising results with their drug Remdesivir, and has already begun selling it this month. Moderna reported positive results for their possible vaccine. Same with AstraZeneca. And Pfizer and BioNTech as well. In fact, they just signed a $1.95 billion deal with the U.S. government to buy 100 million doses (assuming their next tests in September/October are successful). But it’s becoming a crowded field with 160 vaccines in development worldwide. There’s plenty of cost to produce all of the above. And not every new product from every company will succeed.

The oil industry had been hit hard as declining demand and overproduction led to a gigantic oversupply. But in all of that carnage, the shipping industry (specifically those that could store crude oil in their tankers) had seen numerous stocks spike up as customers looked to those firms to store their oil.

The point is, there will be huge opportunities in many different sectors and industries as this confirmed bull market unfolds.

Some of the breakout stocks will be tried and true names we all know and love.

And others will be stocks you may never have even heard of before.

That’s because this virus outbreak, and the upheavals it’s brought about for businesses and consumers, will change large portions of our economy. And the companies that can adapt will thrive and become new market leaders. While those that can’t will suffer.

And you need to know how to determine which is which.

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.

Where to Start 

There's a simple way to add a big performance advantage for 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 +122.2%, +153.0%, and even +156.8% from 2017 through Q2 2020.

The course will also help you create and test your own stock-picking strategies.

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Thanks and good trading,

Kevin

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.