Stocks got off to a rough start this year. And they are still struggling.
40-year high inflation, rising interest rates, the war on Ukraine, which sent already high energy prices even higher, has taken its toll on the market.
Pullbacks and corrections are common. In fact, stocks usually pull back about -5% roughly 3-4 times per year, while the market typically corrects -10% on average of once a year.
A pullback is defined as a decline between -5% and -9.99%, while corrections are defined as declines between -10% and -19.99%.
All of the major indexes have fallen into correction territory. Actually, the S&P briefly slipped into bear market territory (which is defined as a decline of -20% or more), on Friday, intraday, before escaping by the close. But the Nasdaq breached bear market territory back in March and is still in it.
What’s roiling the market right now is the fear of a recession. Some think we may already be in one.
While bear markets typically precede recessions, they don’t always do.
True, GDP was down -1.4% in Q1, so we’re technically halfway there. But the Federal Reserve Bank of Atlanta’s GDP Now forecast has Q2 GDP coming in at 2.4%.
And for the record, last quarter’s Q1 contraction actually showed lots of positives in the economy with consumer spending up 2.7% q/q, which was a faster growth rate than the previous quarter’s 2.5%; business investment was up 9.2%; residential investment was up 2.1%; and final sales to private domestic purchasers were up 3.7% vs. last quarter’s 2.6%. (What tanked Q1 GDP numbers was lower government spending, lower exports, and lower inventories, as businesses built up supplies very slowly, in spite of surging demand.)
So, the prospect of 2 quarters in a row of negative GPD does not look like it’s in the cards for now.
Moreover, for comparison purposes, the S&P was down by nearly -20% at its worst so far. But during the flash crash of 2020, at the beginning of the pandemic when everybody thought the world was coming to an end, the S&P plunged -33.9%. And due to the economic lockdown, we actually saw a real recession of 2 quarters in a row of negative GDP with Q1 down by -5.1% and Q2 down by -31.2%.
That was real economic carnage. And that’s why stocks tanked.
We aren’t anywhere near anything like that.
Plus, it should be noted 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 the Fed pegging rates at 1.9% by the end of this year, and 2.8% next year, with no further rate hikes in 2024, we’ll still be a long way from 4%.
And that’s why talk of a recession looks to be premature. And why the current sell-off looks to be overdone.
Now, as the John Maynard Keynes saying goes, the “markets can remain irrational longer than you can remain solvent.”
So, one can’t dismiss the possibility of going down even further.
But the current sell-off has pushed valuations down to the lowest level in more than 2 years (since April 2020 during the pandemic).
And whether the lows are already in, or whether they’ve yet to be seen, stocks are trading at a bargain. And given their growth prospects, if they end up going even lower, the bargains look to only get better.
So, now is the time to start planning for the next leg up. And picking up stocks at prices you only wished you could have gotten into before.
But before you make your next trade, please read this first to learn how to put the probabilities of success in your favor.
Knowledge Is Power
We’ve all heard the old adage, ‘knowledge is power.’
It’s a great saying because it’s true.
And that saying couldn’t be truer than when it comes to investing.
Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that ‘had you known beforehand, you never would have gotten into it in the first place.’
I’m not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.
I’m talking about things that you could have known about or SHOULD have known about before you got in.
Did You Know?...
• Did you know that roughly half of a stock's price movement can be attributed to the group that it’s in?
• Did you also know that oftentimes a mediocre stock in a top performing group will outperform a ‘great’ stock in a poor performing group?
• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?
• And did you also know that the top 10% of industries outperform the most?
More . . .
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In 2021 - while the market climbed +28.8% - these strategies actually produced gains up to +48.2%, +67.6%, and even +95.3%.¹
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Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.
That’s what is meant by ‘knowledge is power.’ Knowable things that you need to know.
That’s not to say that stocks in crummy industries won’t go up -- they do. And that’s not to say that stocks in good industries won’t go down -- because they do too.
But more stocks go up in the top industries, and more stocks go down in the bottom industries.
And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making any money?
Did You Know?...
• Did you know that stocks with ‘just’ double-digit growth rates typically outperform stocks with triple-digit growth rates?
• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that the companies with the highest growth rates would do the best. But that doesn’t always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward estimate revision to 5 cents, that’s a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.
If you’ve ever wondered how a stock with a triple-digit growth rate could possibly go down -- that’s how.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And focusing on companies with growth rates above the median, but less than 50%, has produced some of the best results.
Did You Know?...
• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 x as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they’re for you or against you.
• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than 1? And did you know that those with a Price to Sales ratio of greater than 4 have typically been shown to lose money? That doesn’t mean that all stocks with a P/S ratio of less than one will go up, and those over four will go down, but you can greatly increase your odds of success by following these valuations.
• Did you know that the Zacks Rank is one of the best rating systems out there? And did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years, with an average annual return of 25% per year? That’s more than 2 x the returns of the S&P with an 82% annual win ratio. And when doing this year after year, that can add up to a lot more than just two times the returns.
• Did you know that two simple filters added to the Zacks Rank #1 stocks significantly increases its returns? What if you did? We have a screen that utilizes these two additional items to narrow that list down to 5 high probability stocks per week. Over the last 22 years (2000 thru 2021), using a 1-week rebalance, it’s produced an average annual return of 51.2%, which is 6.8 x the market. That screen is aptly called the Filtered Zacks Rank 5 screen.
Do you know how well your stock picking strategies have performed?
Whether good or bad -- do you know why?
Do you know if your favorite item to pick stocks with is helping you or hurting you?
If not, you should.
Beat The Market On Your Next Trade
With stocks poised for another historic move, 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 actually produced gains up to +48.2%, +67.6%, and even +95.3% in 2021.¹
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.
Please note: Copies of the book are limited and your opportunity to get one free ends midnight Saturday, May 21, unless we run out of books first. If you're interested, I encourage you to check this out now.
Find out more about Zacks Home Study Course >>
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.