With the economy set for historic growth this year, stocks are poised to soar.
The dreaded pullback everyone had been fearing has come and gone.
At its worst, the Dow was down by -5.66%, the S&P by -5.87%, and the Nasdaq by -8.38%.
Since then, the Dow has surged by 5.36%, the S&P by 5.45%, and the Nasdaq by 5.01%, all in less than 3 weeks.
Unfortunately, too many investors panicked during this latest pullback as they braced for more downside. Some sold. Others shorted. And some refused to buy this market for fear of it going lower.
Then it didn’t.
And stocks, once again, are back on their record run.
We saw the same story play out earlier this year in mid-February through early March.
We saw a quick pullback. Investors feared for the worst. Then stocks snapped back and raced to new all-time highs.
If you missed out on these latest rallies due to disbelief, or fear, it’s not too late.
Because it looks like there’s a lot more upside to go.
There was nothing ominous in the two pullbacks we saw this year.
It was just your normal, ordinary pullback.
Every bull market has them.
In fact, stocks usually pull back about -5% roughly 3-4 times per year. (A pullback is defined as a decline between -5% and -9.99%.) And stocks usually correct -10% on average about once a year. (A decline of -10% to -19.99% is called a correction.)
But these are the pauses that refresh before the next leg up.
And now YTD, the Dow is up 15.7%, the S&P is up 20.1%, and the Nasdaq is up 17.2%.
While pullbacks are never fun when they’re happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.
New Highs Beget Higher Highs
But now that the pullback is over, and stocks are back on the upswing, plenty of those same people are wondering whether to buy – having traded in their fear of a pullback for fear of buying stocks making new highs.
(Why do some people make investing so unnecessarily hard?)
For some reason, people seem reluctant to buy stocks after making new highs. I suppose they may feel like they missed the move, or that now stocks have more room to fall.
But statistically, this is just not true.
For one, the S&P, for example, has made 60 new highs this year alone.
Can you imagine all of the money you would have left on the table if you were afraid to get into stocks making new highs?
But second, and more importantly, studies have shown that stocks making new highs have a tendency of making even higher highs.
In fact, using S&P price data going all the way back to the 1950’s, it shows that stocks typically go up in the subsequent six months following new all-time highs.
This means that stocks making new highs aren’t at any greater risk of going down. Quite the contrary, there’s a higher probability of stocks going up even further!
More . . .
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Climbing the Wall of Worry
Inflation concerns continue to grip the market.
And some worry that if inflation gets too hot, the Fed might have to raise interest rates sooner rather than later.
But let’s remember that some inflation is good. Not too much, but some. And one person’s cost increase is another person’s profit.
It’s also important to know that stocks typically perform well in inflationary environments.
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 now willing to let it run hotter than normal, for longer than normal, before doing anything on rates. (Although, it looks like they will begin tapering their bond buying by year’s end, and possibly as soon as early November. But the market cheered the news when the Fed tipped their hat on this.)
It’s true that inflation is too hot right now. And that’s in large part due to supply disruptions, worker shortages, and base effects (comparing current prices to last year’s pandemic-subdued numbers).
But these are still considered transitory. And the aforementioned problems should start seeing some relief, as more and more workers rejoin the labor force, and port congestion starts easing as the shipping docks move to a 24/7 workday/workweek until they can clear the backlogs. Not only will this add to economic growth, but it will simultaneously help to ease inflation.
In fact, the Fed has reduced inflation expectations for 2022 and 2023, putting it at 2.1%.
Let’s also remember that inflation, in and of itself, doesn’t tank economies. High interest rates do.
But the prospect of ‘high’ interest rates is literally years and years down the road.
Record Low Interest Rates Are Here To Stay For Some Time
As you know, the Fed has injected trillions of dollars of monetary stimulus into the economy through their bond buying, various liquidity measures, and record low interest rates.
They have repeatedly pledged to do whatever it takes to support the economy, and get back to full employment.
And in doing so, they have constantly reiterated that they plan to keep interest rates near zero for the foreseeable future. That means at least through the rest of this year. And at the earliest, rates aren’t expected to budge until sometime next year. But it’s more likely that rates don’t begin to move up until sometime in 2023.
Even when they do begin to raise rates, 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%.
And at quarter-point moves (even half-point moves), it would take years to get to that level.
Bullish Economic Growth
In the meantime, the market has been focusing on the historic economic growth.
With the Fed projecting their full-year GDP forecast at 5.9%, which would be the fastest growth rate in 37 years, it’s easy to see why stocks have been going up.
Then add in the unprecedented fiscal stimulus that has already been approved by Congress, not to mention the infrastructure package, and other domestic spending bills that are likely on the way in the near offing, and the economy looks set to soar.
Add all that up, coupled with falling virus counts, and the reopening of the economy, and we’re about to see 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.
That’s also why people are expecting this to be the beginning of a multiyear boom.
In fact, as Jamie Dimon said in his annual letter to shareholders earlier this year; “this boom could easily run into 2023 because all the spending could extend well into 2023.”
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.
And not squandering this opportunity with preventable mistakes.
If you ever wished you could have traded historic times in the market differently, now is your chance.
Because the next historic run-up could be just around the corner.
And the time to get ready for it is now.
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 25.4% per year? That's more than 2x the S&P. But when doing this year after year, that can add up to a lot more than just double 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: As mentioned earlier, 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 through 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 through 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 through 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.
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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.
Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.
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Thanks and good trading,
Zacks Executive VP Kevin Matras is responsible for all of 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.