"Someone is sitting in the shade today because someone planted a tree a long time ago." – Warren Buffett
A confluence of unforeseen geopolitical and economic events resulted in a difficult market environment last year. A war in Ukraine, Chinese lockdowns that led to supply chain issues, and a housing market recession due to higher mortgage rates all contributed to the negative returns. Yet as painful as 2022 was, the drastic drawdowns have presented a unique opportunity.
There have been many bear markets over time, but one unequivocal truth is that stocks have always returned to new highs. We don’t know exactly when this market will eclipse its former highs, but we don’t expect that incredible streak to end. Now may be an ideal period for investors to plant those trees to achieve the benefits of long-term investment returns.
The average year witnesses an S&P 500 pullback of 13.7%, and then a gain of 20.2% a year off those lows. But large bear markets (like last year) normally experience much better returns in the following year. Dating back to 1962, when there's a 25% bear market or greater, stocks are up 38% a year later on average and have been lower only once out of nine times. Take note, as of now the S&P 500 bottomed in October after a 25% intra-year bear market, and the index is up more than 7% in 2023:
Image Source: Zacks Investment Research
Despite the technical progress this year, investor sentiment and positioning remain significantly bearish. The recent Bank of America Global Fund Manager Survey illustrated that investors were the most underweight equities relative to bonds since the Great Financial Crisis. This survey looks at more than 600 money managers, and it is quite apparent that overall positioning is defensive as high levels of pessimism remain.
Remember, the crowd is usually wrong. The lack of respect for the market’s recovery will likely aid a continuation of the recent rally off the 2022 lows.
Coming out of dark times, it can be difficult to see a better path forward. But the market is made up of individuals, and we humans are a resilient species that have fought and innovated our way through a vast history of wars, inflation, crashes and depressions. As the economic outlook improves, stocks are poised to fare well throughout the remainder of 2023 and beyond.
Former Headwinds Reverse to Tailwinds
Last year, the Federal Reserve embarked on the most aggressive tightening cycle in monetary policy in four decades as inflation soared. But as nearly all of the expected rate hikes have now taken place, the Fed is likely to allow these hikes to work their way into the economy and pause their rate-hiking scheme.
Going into May’s widely anticipated rate hike, the Federal Funds Rate was at an upper bound of 5%. After the latest 25-basis point move, the upper range of the key policy rate is now at 5.25%. The most recent Consumer Price Index (CPI) data from April showed that prices increased at a 4.9% clip year-over-year. Keep in mind that the inflation data is lagging, but with the latest hike, the Federal Funds Rate is now above the CPI – a necessary ingredient that has preceded the end of the past eight tightening cycles. This adds credence to the view that May’s hike may have been the final push, culminating in the end of this current hiking cycle:
Image Source: Zacks Investment Research
Back in April, the U.S. Bureau of Economic Analysis (BEA) conveyed the latest Personal Consumption Expenditure (PCE) inflation data from March, which was mainly in line with the consensus of a slight cooling. The PCE index reflects changes in the prices of goods and services purchased by consumers.
The headline figure decelerated to 4.2% year-over-year, substantially lower than the 5.1% reading in February. A monthly rise of just 0.1% was the softest dating back to July 2022. Energy prices declined 3.7% on the month, while food prices dropped 0.2%, relieving households of at least some pressure.
Core PCE, which strips out the more volatile food and energy components and is the Fed’s preferred inflation gauge, came in at 4.6% - just above estimates, but a tad lower than the 4.7% from February.
Clearly, the headwind of rising inflation has now reversed course, with Fed Chairman Powell even acknowledging the recent disinflation trend. We’ll get more on the inflation front later this week, as April’s CPI data is due out on Wednesday morning.
On a similar note, rising bond yields served as another headwind last year. Rising yields not only hurt bond investors, but equity investors as well. Below we can see the intermarket relationship that yields and stocks tend to have, with the 10-year treasury yield pictured below the S&P 500. Notice that stocks fell as yields surged last year:
Image Source: StockCharts
This dynamic has now reversed course in 2023, with rates falling and equities rising. Falling yields are now acting as a tailwind for stocks:
Image Source: StockCharts
The Recession Question
Average forecasts are still calling for a recession despite an economy that continues to chug along. Looking at the NBER’s (National Bureau of Economic Research, the official arbiter of expansions and contractions in the U.S.) preferred list of economic indicators, two of the indicators have particular importance. From the NBER:
"In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment."
The labor market remains resilient despite the Fed’s attempts to slow the economy via interest rate hikes. Last year, more than 4.5 million jobs were created. Consider this – out of the previous 17 times in which at least 3 million jobs were created in the previous year, 16 of them did not experience a recession in the following year.
A recent Employment Situation report showed that 253,000 new jobs were created in April versus a consensus of 178k. Meanwhile, the unemployment rate declined from 3.5% to 3.4% against expectations of a slight bump to 3.6%. The strong jobs market is certainly hindering the recession argument.
On the same token, real personal income excluding transfer receipts is hovering near all-time highs. Income is an important consideration because it impacts consumer spending, which comprises 70% of the U.S. Gross Domestic Product (GDP). As more people become employed and overall income in the economy increases, consumer spending should remain strong.
The economy has thus far avoided a recession, and a resilient labor market along with rising real personal incomes are two big reasons why that may remain the case.
Bullish Shift in Market Leadership
Markets will likely continue to climb the proverbial “wall of worry” as corporate earnings and economic activity come in better than originally anticipated. The Q1 earnings season has turned out to be much better than most had feared. Approximately 86% of S&P 500 companies have reported Q1 results, and roughly 78% of companies have beaten earnings estimates. We know that corporate management normally likes to keep expectations low, but the beat rate implies that companies are getting a better handle on the macroeconomic environment.
The technology sector has really stood out this earnings season, providing some backing that supports the strong returns year-to-date. Improved margins along with a weaker dollar have given earnings a boost. Last year, the greenback experienced one of its largest annual gains ever as higher rates attracted more investors. But as the outlook for future interest rate levels declines, the dollar is falling in tandem – providing another lift to corporate earnings.
The Nasdaq has come roaring back to life, up nearly 17% this year. Apart from better-than-expected tech earnings, breakthroughs in artificial intelligence research that have great potential (including scientific and economic implications) have investors buzzing.
As the bull resurfaces, normally technology and other innovative pockets of the market lead the way. These leaders show us that they are able to attract significant investment and buying pressure. Growth and technology names have come back to the forefront, and it is with this underlying premise that I delve deeper into two individual stocks poised to outperform.
2 Tech Stocks with Stunning Upside for the Coming Bull Market
There will be ups and downs but, as I mentioned, headwinds are changing to tailwinds for stocks for many months to come.
Especially for tech stocks, and especially for two of them in particular.
This presents a significant opportunity for investors and I encourage you to explore it right away. That’s why I just released an urgent briefing: 2 Tech Stocks with Stunning Upside for the Coming Bull Market.
It names and explains two standouts that have already been successful, but are just beginning to tap their true potential:
Stock #1: Semiconductor supplier is in the right industry at the right time. Multiple acquisitions and products in extreme demand has positioned them for a jump in stock price.
Stock #2: This company’s e-commerce and sports platforms are making them a shining star in the booming Internet-Software industry.
There’s a big PLUS along with this briefing. To help you get the most of the coming market resurgence, we’ll give you 30-day access to all recommendations from all Zacks trading and investing services.
Your cost for all this? Only $1 and not a penny more.
We’re limiting this opportunity and it expires midnight Thursday, May 18. No extensions, so please be sure to take advantage right now.
Click now for 2 tech stocks with stunning upside plus 30-day access to all Zacks buys and sells for $1 >>
Cheers to Your Investing Success,
Bryan
Bryan Hayes, CFA manages our Zacks Income Investor and Headline Trader portfolios. He employs a combination of fundamental and technical analysis and has developed a unique approach to selecting stocks with the best profit potential. You can also find him covering a host of investment topics for Zacks.com.
Image: Bigstock
Stocks Now Headed for New Highs?
"Someone is sitting in the shade today because someone planted a tree a long time ago." – Warren Buffett
A confluence of unforeseen geopolitical and economic events resulted in a difficult market environment last year. A war in Ukraine, Chinese lockdowns that led to supply chain issues, and a housing market recession due to higher mortgage rates all contributed to the negative returns. Yet as painful as 2022 was, the drastic drawdowns have presented a unique opportunity.
There have been many bear markets over time, but one unequivocal truth is that stocks have always returned to new highs. We don’t know exactly when this market will eclipse its former highs, but we don’t expect that incredible streak to end. Now may be an ideal period for investors to plant those trees to achieve the benefits of long-term investment returns.
The average year witnesses an S&P 500 pullback of 13.7%, and then a gain of 20.2% a year off those lows. But large bear markets (like last year) normally experience much better returns in the following year. Dating back to 1962, when there's a 25% bear market or greater, stocks are up 38% a year later on average and have been lower only once out of nine times. Take note, as of now the S&P 500 bottomed in October after a 25% intra-year bear market, and the index is up more than 7% in 2023:
Image Source: Zacks Investment Research
Despite the technical progress this year, investor sentiment and positioning remain significantly bearish. The recent Bank of America Global Fund Manager Survey illustrated that investors were the most underweight equities relative to bonds since the Great Financial Crisis. This survey looks at more than 600 money managers, and it is quite apparent that overall positioning is defensive as high levels of pessimism remain.
Remember, the crowd is usually wrong. The lack of respect for the market’s recovery will likely aid a continuation of the recent rally off the 2022 lows.
Coming out of dark times, it can be difficult to see a better path forward. But the market is made up of individuals, and we humans are a resilient species that have fought and innovated our way through a vast history of wars, inflation, crashes and depressions. As the economic outlook improves, stocks are poised to fare well throughout the remainder of 2023 and beyond.
Former Headwinds Reverse to Tailwinds
Last year, the Federal Reserve embarked on the most aggressive tightening cycle in monetary policy in four decades as inflation soared. But as nearly all of the expected rate hikes have now taken place, the Fed is likely to allow these hikes to work their way into the economy and pause their rate-hiking scheme.
Going into May’s widely anticipated rate hike, the Federal Funds Rate was at an upper bound of 5%. After the latest 25-basis point move, the upper range of the key policy rate is now at 5.25%. The most recent Consumer Price Index (CPI) data from April showed that prices increased at a 4.9% clip year-over-year. Keep in mind that the inflation data is lagging, but with the latest hike, the Federal Funds Rate is now above the CPI – a necessary ingredient that has preceded the end of the past eight tightening cycles. This adds credence to the view that May’s hike may have been the final push, culminating in the end of this current hiking cycle:
Image Source: Zacks Investment Research
Back in April, the U.S. Bureau of Economic Analysis (BEA) conveyed the latest Personal Consumption Expenditure (PCE) inflation data from March, which was mainly in line with the consensus of a slight cooling. The PCE index reflects changes in the prices of goods and services purchased by consumers.
The headline figure decelerated to 4.2% year-over-year, substantially lower than the 5.1% reading in February. A monthly rise of just 0.1% was the softest dating back to July 2022. Energy prices declined 3.7% on the month, while food prices dropped 0.2%, relieving households of at least some pressure.
Core PCE, which strips out the more volatile food and energy components and is the Fed’s preferred inflation gauge, came in at 4.6% - just above estimates, but a tad lower than the 4.7% from February.
Clearly, the headwind of rising inflation has now reversed course, with Fed Chairman Powell even acknowledging the recent disinflation trend. We’ll get more on the inflation front later this week, as April’s CPI data is due out on Wednesday morning.
On a similar note, rising bond yields served as another headwind last year. Rising yields not only hurt bond investors, but equity investors as well. Below we can see the intermarket relationship that yields and stocks tend to have, with the 10-year treasury yield pictured below the S&P 500. Notice that stocks fell as yields surged last year:
Image Source: StockCharts
This dynamic has now reversed course in 2023, with rates falling and equities rising. Falling yields are now acting as a tailwind for stocks:
Image Source: StockCharts
The Recession Question
Average forecasts are still calling for a recession despite an economy that continues to chug along. Looking at the NBER’s (National Bureau of Economic Research, the official arbiter of expansions and contractions in the U.S.) preferred list of economic indicators, two of the indicators have particular importance. From the NBER:
"In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment."
The labor market remains resilient despite the Fed’s attempts to slow the economy via interest rate hikes. Last year, more than 4.5 million jobs were created. Consider this – out of the previous 17 times in which at least 3 million jobs were created in the previous year, 16 of them did not experience a recession in the following year.
A recent Employment Situation report showed that 253,000 new jobs were created in April versus a consensus of 178k. Meanwhile, the unemployment rate declined from 3.5% to 3.4% against expectations of a slight bump to 3.6%. The strong jobs market is certainly hindering the recession argument.
On the same token, real personal income excluding transfer receipts is hovering near all-time highs. Income is an important consideration because it impacts consumer spending, which comprises 70% of the U.S. Gross Domestic Product (GDP). As more people become employed and overall income in the economy increases, consumer spending should remain strong.
The economy has thus far avoided a recession, and a resilient labor market along with rising real personal incomes are two big reasons why that may remain the case.
Bullish Shift in Market Leadership
Markets will likely continue to climb the proverbial “wall of worry” as corporate earnings and economic activity come in better than originally anticipated. The Q1 earnings season has turned out to be much better than most had feared. Approximately 86% of S&P 500 companies have reported Q1 results, and roughly 78% of companies have beaten earnings estimates. We know that corporate management normally likes to keep expectations low, but the beat rate implies that companies are getting a better handle on the macroeconomic environment.
The technology sector has really stood out this earnings season, providing some backing that supports the strong returns year-to-date. Improved margins along with a weaker dollar have given earnings a boost. Last year, the greenback experienced one of its largest annual gains ever as higher rates attracted more investors. But as the outlook for future interest rate levels declines, the dollar is falling in tandem – providing another lift to corporate earnings.
The Nasdaq has come roaring back to life, up nearly 17% this year. Apart from better-than-expected tech earnings, breakthroughs in artificial intelligence research that have great potential (including scientific and economic implications) have investors buzzing.
As the bull resurfaces, normally technology and other innovative pockets of the market lead the way. These leaders show us that they are able to attract significant investment and buying pressure. Growth and technology names have come back to the forefront, and it is with this underlying premise that I delve deeper into two individual stocks poised to outperform.
2 Tech Stocks with Stunning Upside for the Coming Bull Market
There will be ups and downs but, as I mentioned, headwinds are changing to tailwinds for stocks for many months to come.
Especially for tech stocks, and especially for two of them in particular.
This presents a significant opportunity for investors and I encourage you to explore it right away. That’s why I just released an urgent briefing: 2 Tech Stocks with Stunning Upside for the Coming Bull Market.
It names and explains two standouts that have already been successful, but are just beginning to tap their true potential:
Stock #1: Semiconductor supplier is in the right industry at the right time. Multiple acquisitions and products in extreme demand has positioned them for a jump in stock price.
Stock #2: This company’s e-commerce and sports platforms are making them a shining star in the booming Internet-Software industry.
There’s a big PLUS along with this briefing. To help you get the most of the coming market resurgence, we’ll give you 30-day access to all recommendations from all Zacks trading and investing services.
Your cost for all this? Only $1 and not a penny more.
We’re limiting this opportunity and it expires midnight Thursday, May 18. No extensions, so please be sure to take advantage right now.
Click now for 2 tech stocks with stunning upside plus 30-day access to all Zacks buys and sells for $1 >>
Cheers to Your Investing Success,
Bryan
Bryan Hayes, CFA manages our Zacks Income Investor and Headline Trader portfolios. He employs a combination of fundamental and technical analysis and has developed a unique approach to selecting stocks with the best profit potential. You can also find him covering a host of investment topics for Zacks.com.