For all the talk about inflation and the subsequent worries over stock prices, the markets continue to perform well.
Of course, there will be volatility. There always is.
But YTD, the Dow is up 8.8%, the S&P is up 10.9%, the Nasdaq is up 8.9% and literally just made another new all-time high on Thursday, and the Russell 2000 is up 13.4%.
How can this be?
Higher inflation was supposed to tank stocks and kill the economy.
But that’s not true.
Higher inflation doesn’t ruin the economy or the market.
High interest rates do.
But with the Fed, just a few days ago, telling the world that interest rates will remain near zero, and are likely to stay that way for the rest of the year, and next year, and for a portion of 2023, the threat of high interest rates is years away.
And I mean years, and years away.
Because even when they do begin to raise rates, let’s say in mid-to-late 2023, they are essentially starting from zero.
And it should be noted that over the last 50 years, there’s never been a recession (aside from last year’s pandemic-induced plunge), when the Fed Funds rate was under 4%.
At quarter point moves (even half point moves), it would take many years to get to that level.
In the meantime, there appears to be an unfettered path for the economy and stocks to soar.
Bullish Growth Outlook
One thing that keeps getting lost in all of this inflation talk is growth.
The economy is roaring, and is only expected to get stronger as the country fully reopens.
The Fed just raised their full-year growth forecast from 6.5% to 7%, which would make this year’s GDP the fastest growth rate in 37 years!
Now add in the unprecedented amount of stimulus money being pumped into the economy.
Roughly $6 trillion in stimulus funds have already been approved.
And it looks like there’s another $1 trillion or more on its way once the infrastructure bill gets passed.
What we are about to see is a record amount of pent-up economic demand meet a record amount of stimulus money, and that’s a recipe for explosive economic growth and stock market gains.
To quote Jamie Dimon, from his recent annual shareholder letter, he said that we could be looking at a “Goldilocks moment” for the economy.
He went on to say that, “this boom could easily run into 2023 because all the spending could extend well into 2023.”
That sounds pretty bullish.
And booming economies don’t crush stocks. They send them higher. Much higher.
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Over the past five years (2016 through 2020), while the market climbed an impressive +103.9%, these strategies actually produced gains up to +130.5%, +381.1%, and even +580.6%.¹
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Some Inflation Is Good
People also need to realize that stocks typically perform well in inflationary environments.
I’m not talking about runaway inflation.
But obviously, some inflation is good. That’s why the Fed has a target of 2%, and not 0%. In fact, over the last several years, the Fed is on record as being more concerned over low inflation than high inflation.
And that’s why they are willing to let it run a little hotter than normal, for a little longer than normal, before doing anything on rates.
Moreover, even though they raised their inflation forecast this year to 3.4%, they believe it will be transitory, brought on by supply disruptions due to Covid. But once the bottlenecks ease, they believe inflation will ease as well.
Interestingly, this was the sentiment of top money managers earlier this week when a Bank of America Global Fund Manager Survey showed that 72% of respondents believe that inflation will indeed be transitory, and that it’s largely due to the supply chain disruptions brought about by the virus, and that it will fall once these disruptions subside.
That’s also why the Fed expects inflation to fall in 2022 from 3.4% to 2.1%. And stay at 2.1% in 2023.
Consumers, Banks, and Corporate America
It’s true that inflation can eat into one’s purchasing power.
But it’s also true that one person’s cost increase is another person’s profit.
One of the reasons why the Fed likely seems comfortable with their inflation outlook, aside from the perceived temporary nature of it all, is because of the health of the consumer.
Personal savings rates over the last year have been in record territory. Some of that was fueled by the stimulus checks adding to household income, not to mention reduced spending with the economy not fully reopened.
Nonetheless, in aggregate, the consumer is in one of the strongest positions in decades.
Banks are also in great shape. At the end of last year, the Fed released the results of their stress tests on the big banks. And they found that the banking system has been a source of strength. And they said that none of the banks even came close to falling to their minimum capital ratio thresholds, even during the worst of the pandemic.
That’s great news. And they’ve only grown stronger since.
Same with corporate profits.
In fact, corporate profits just hit new all-time highs.
We just came off of a stellar earnings season.
And the growth outlook appears exceptionally strong with estimates on the rise.
History In The Making
What we’re seeing right now is history in the making.
And historic times typically lead to historic price gains.
So you need to make sure you’re taking full advantage of it.
That means getting into the right stocks, and staying out of the wrong ones.
And not squandering this opportunity with preventable mistakes.
If you ever wished you could have traded the market during historic times differently, now is your chance.
Because the next historic run-up could be upon us.
Do What Works
So how do you fully take advantage of this historic opportunity?
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 26 of the last 32 years with an average annual return of 24.7% per year? That's nearly 2.5 x the S&P. But when doing this year after year, that can add up to a lot more than just two and a half 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.
For example, if your strategy did nothing but lose money year after year, trade after trade, over and over again, there’s no way you'd want to use that strategy to pick stocks with. Why? Because it's proven to pick bad stocks.
On the other hand, if your strategy did great year after year, trade after trade, over and over again, you'd of course want to use that strategy to pick stocks with. Why? Because it's proven to pick winning stocks.
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: 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 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 45.5% vs. the S&P’s 6.6%, which is nearly 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 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 51.2%, beating the market by 7.6 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 21 years (2000 thru 2020), using a 1-week rebalance, the average annual return has been 51.3%, which is 7.7 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
Now that the economic recovery is in full swing, 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 +130.5%, +381.1% and even +580.6% over the past five years (2016 through 2020).¹
The course will also help you create and test your own stock-picking strategies.
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Thanks and good trading,
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.
¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.