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Market Resilience Could Bring Big Stock Gains

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It’s been an interesting year so far to say the least.

Stocks are still down, but gladly, they are well off their lows with the Dow only down -4.45% YTD, the S&P down -5.82%, and the Nasdaq down -12.4%.

But the pullback in the market was roughly twice that just a few short weeks ago.

Not surprising, with inflation hitting 40-year highs, Russia’s war on Ukraine roiling already high oil and gas prices, and the Fed embarking on their long-awaited normalization of monetary policy (raising interest rates and drawing down their record high balance sheet).

You’d think with the above headwinds, stocks would be markedly lower.

But the tailwind that seems to be overriding everything is the continuing strength of the economy and even stronger jobs market.

That’s why stocks continue to trade within striking distance of their all-time highs.

And why it looks like they’re poised to eventually breakout to new highs in the not too distant future.

Inflation

The first thing that needs tackling, however, is inflation.

Some inflation is actually good for the market (one person’s cost increase is another person’s profit -- and why the Fed likes to see a steady 2% inflation rate). And historically, stocks typically perform well in inflationary environments.

But everyone can agree that the current, excessively high inflation rate is not good for anyone.

And that’s why the Fed has finally sprung into action.

The Fed raised interest rates back on March 16th (the first hike in more than 3 years), with a quarter-point increase.

Investors cheered the move since many felt the Fed let inflation run too hot for too long. And there was relief that the move to combat inflation had finally begun.

The next move is expected at the conclusion of their 2-day FOMC meeting on May 4th.

The FOMC minutes from their last meeting (released earlier this week), showed many participants were in favor of increasing rates by 50 basis points at future meetings, if inflation continued to persist.

Well, it has. And the future is just 4 weeks away, with all signs pointing to a half-point increase.

That did give pause to the market, as some worry that raising rates too high, too quickly, could slow the economy down too much.

But a slowing economy has not been an issue. Just the opposite. It’s been too hot. And that’s partly why inflation has gotten so bad.

Quite frankly, the bigger risk is not raising enough and going too slowly.

And that’s why the 50 basis point move will likely be cheered once it happens.

Because the economy is more than strong enough to just withstand tighter monetary policy. According to Fed Chair, Jerome Powell, it should actually “flourish in the face of less accommodative monetary policy.”

Taking some of the excess out of the economy, which in turn can help tamp down inflation, could go a long way to help elongate the current economic expansion that we are in.

More . . .

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Interest Rates

The Fed has forecast that rates could hit as high as 1.9% by year’s end.

They also predicted the Fed Funds rate could reach 2.8% by the end of 2023.

But they are expecting rates to remain at 2.8% in 2024, meaning no further rate hikes after next year.

Moreover, they’re expecting PCE inflation to come in at 4.3% by year’s end, 2.7% in 2023, and 2.3% in 2024.

And they are forecasting GDP growth at 2.8% this year, 2.2% in 2023, and 2.0% in 2024.

Simply put, by raising rates as outlined above, they see inflation finally coming down, and sustainable growth to continue.

And rates will still be relatively low.

This is important because some out there worry that raising rates will cause a recession.

But history has shown that over the last 50 years, there’s never been a recession (aside from 2020’s pandemic-induced plunge), when the Fed Funds rate was under 4%.

And with officials suggesting rates will not exceed 2.8% (by the end of 2023 and all of 2024), that’s a far cry from 4%.

Oil Prices And The War On Ukraine

High oil prices are also adding to concerns.

But $100 a barrel oil doesn’t automatically spell doom for the economy.

In fact, oil traded above $100 in 2011, 2012, 2013, and 2014, all while GDP averaged over 2.0% during that time.

Demand for oil is strong, especially as the world continues to reopen its economies after the pandemic.

During the pandemic, when demand fell, prices crated, and production fell as well.

But now that demand is up, prices have followed suit. Production is still playing catch-up. But producers virtually everywhere are racing to increase production.

Especially since much of the world has either cut-off, or is in the process of trying to cut-off, its dependence on Russian oil due to their invasion of Ukraine.

That shortfall will have to be made up somewhere. And producers are vying to gain that new market share.

A meaningful increase in production won’t happen overnight, but it will happen. And prices will eventually come down, like they always do.

As the saying goes, ‘the cure for high prices is high prices.’ And the high prices will bring in the much needed increase in production that ultimately sends prices lower.

Back To Business

The recent correction in the market was/is a blessing in disguise.

For one, corrections happen about once a year. These are normal occurrences that take place in every bull market.

With this one out of the way this year, the market can get back to the business of going higher.

And now more than ever, as the official start to earnings season (April 20th), is just 1½ weeks away.

Since stocks typically go up during earnings season, getting in while prices are still down for the year could prove to be a very profitable move.

Do What Works 

There’s no need to do anything fancy at these levels.

Just do what works.

That means focusing on stocks that have the highest probability of moving up the most.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years (an 82% win ratio) with an average annual return of 25% per year? That's more than 2 x the S&P. And consistently beating the market year after year can add up to a lot more than just two times the returns.

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. 

Stock Picking Secrets Of The Pros

One of the best ways to begin picking better stocks is to see what the pros, who use these methods, are doing.

Whether you’re a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.

This applies to large-caps and small-caps, biotech and high-tech, ETF’s, stocks under $10, stocks about to surprise, even options, and more.

Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods that work, from experts who have demonstrated their ability to beat the market.

The best part about these strategies is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade. 

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Stock #1: This under-the-radar, small-cap semiconductor player is rapidly accelerating its chipmaking capacity and strategic Chinese exposure. Analysts across the board have set price targets of +75% to +150% over the next 12-18 months.

Stock #2: Energy was the best-performing sector in 2021 and continues to hold that crown in 2022. This stock is up +207% over the past two years and gained +66% in the last year. Cash is pouring in and demand for products is unrelenting.

Stock #3: A retailer separated itself during the pandemic and continues to build momentum. 75% of the U.S. population now lives within 10 miles of one of its stores. It already owns 45+ unique brands. Time to get aboard.

Stock #4: Homeowners are snapping up products to counter soaring energy costs. One small-cap home improvement company is already standing out for both value and growth investors. Inflation is its friend and looks to drive margins and stock price skyward.  

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Thanks and good trading,

Kevin

Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks’ newly released Ultimate Four Special Report.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.