In spite of recent volatility, due to the debt ceiling drama, stocks have performed well this year.
Although, the performance has been uneven. YTD the Dow is actually down a bit by -0.16%. But the S&P is up 9.53%, and the Nasdaq is up 23.9%.
But when you step back and look at them all from their bear market low close last year, they even out with the Dow up 15.2%, the S&P up 17.6%, and the Nasdaq up 27.1%.
Additionally, the Nasdaq officially exited their bear market earlier this month (5/8/23), after notching a gain of more than 20% from last year’s bear market low close. And the Nasdaq is now in a new bull market.
It should be noted too that the Dow exited their bear market as well. They actually exited their bear market late last year (11/30/22) when they closed up by 20% from their bear market low close. Granted, they pulled back shortly after crossing that threshold. But they are back within striking distance (4.16% away), of eclipsing that mark again.
The S&P has not crossed the 20% threshold just yet. But they only need another 2.07% to exit their bear market and begin a new bull.
And it’s looking more and more likely that they’ll get there sooner rather than later.
Especially when you add in the favorable statistical trends of 1) the 4-year Presidential Cycle which shows that year 3 (that’s 2023), is the best year of all 4 years (since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%), and 2) over the last 60 years, if a bear market in the S&P goes down by -25% or more (the S&P was down by -25.4% last year between their bull market high close and their bear market low close), stocks go up on average of 38% a year later (those stats encompass 9 bear markets, with 8 of those seeing stocks up the next year).
Here are some additional reasons why 2023 is shaping up to be a historic bull market.
Peak Inflation Is Behind Us
The previous week’s better than expected Consumer Price Index (CPI), and Producer Price Index (PPI) confirmed that inflation was on the decline.
It’s still too high. But it’s definitely moderating with core (ex-food & energy) CPI (retail inflation) at 5.5% y/y vs. last year’s peak of 6.6%, while core PPI (wholesale inflation) came in at 3.2% y/y vs. last year’s peak of 8.2%.
That also underscored the latest Personal Consumption Expenditures (PCE) index (the Fed’s preferred inflation indicator), which showed core inflation at 4.7% y/y vs. last year’s peak of 5.3%.
With inflation on the decline, and the Fed Funds rate at a midpoint of 5.13% (in line with the Fed’s terminal rate forecast), it appears the Fed is likely to pause come their next Fed meeting in June.
Moreover, while the Fed has said they are not expecting to cut rates until next year, they are forecasting a Fed Funds rate of 4.1% in 2024, and 3.1% in 2025, which means a full 100 basis point rate cut next year, and another 100 bps cut in 2025.
And all of that is bullish for the market.
Continued . . .
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The Outlook Is For Growth
The recession of 2022 has come and gone.
And while some continue to speculate that maybe we could see one in late 2023, the market, at the moment, does not seem to think so.
Q1 GDP, which was previously forecast at 1.1%, was just upgraded to 1.3% in their latest report.
And the Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q2 GDP to come in even higher at 2.9%.
It’s hard to make a case for a recession (defined as 2 quarters in a row of negative GDP), when the economy is expanding.
In fact, Fed Chair, Jerome Powell, at their last FOMC meeting earlier this month, said he thought the “case of avoiding a recession is, in my view, more likely than that of having a recession.”
If we do see growth slow later in the year, it’s important to note that slower growth is still growth.
But it’s also worth noting that personal incomes are hovering near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending.
And with the jobs market still so tight, that continues to underpin the economy.
Interestingly, Mr. Powell seemed to marvel at the robust labor market, commenting with seeming incredulity that rates have risen to 5% while the unemployment rate is still only 3.5%.
None of that is consistent with a recession, and why the outlook is for growth.
Stocks Are Undervalued
Let’s also not forget that valuations are down.
While the P/E ratio for the S&P has risen from last year’s lows, they are still down sharply from 2021’s peak, and are below their five-year average.
And that makes stocks a bargain.
At the same time, the earnings outlook is one of stability.
Not only did this past earnings season come in better than expected, companies provided reassuring enough guidance for the coming quarters, with many upping their outlook.
While few are predicting rip-roaring sales and earnings (although, you might have a different take if you were looking at Nvidia and other companies keyed into the transformational generative AI industry), there are plenty of stocks and industries forecasting outsized growth.
You just have to know where to look.
Proven Profitable Strategies
Picking the right stocks, and staying out of the wrong ones, is a lot easier when there’s a proven, profitable way to do it.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 35 years (an 82% annual win ratio), with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. 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 a smaller, actionable list of stocks that you can buy.
And one of the best ways to do that is to see what stocks the pros, who use these methods, are picking.
Stock Picking Secrets of the Pros
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.
If you're an Aggressive Growth investor; did you know that stocks with the highest growth rates perform almost as poorly as those with the lowest growth rates? It's true.
This is because the companies with the highest growth rates are often unsustainable. And once those sky-high growth rates start to come down, even though they may still be spectacular, the price of the stock will fall back down to earth 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, stick with companies with growth rates above the median for their industry, but less than 50%. That range has produced some of the best results.
If you're a Value investor; do you know which valuation metrics produce the best results? Better yet, do you know what valuation ranges have the highest probability of success?
Testing has shown that the Price to Sales ratio (P/S) is one of the best valuation metrics out there. And stocks with a P/S ratio of less than 1, by far, produce the highest returns. Between 1-2 still produce stellar results. And between 2-3 outperform the market. But once you get over 4, there is a higher probability of losing on that stock than winning.
That, of course, does not mean all stocks with a P/S ratio above 4 will go down. But if the odds of winning are greater below 1 (or at least below 3) and worse above 4, then by simply focusing on stocks in the optimum valuation range, you are now one step closer to having a winner.
This type of factor analysis also applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between.
Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods and strategies that work, from experts who have demonstrated their ability to beat the market.
The best part about these strategies and stock picks 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.
The Pros’ Best Picks For This Market
Here's an easy way to find them:
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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 start our see-all Zacks Ultimate $1 experience today.