You read that title right.
The S&P will double.
And not just eventually. But over the next 5 years (or sooner).
Sounds like a Herculean task on the surface, but it's really not.
In fact, the market only needs to gain on average of 14.9% per year in order to do so. That's not such a stretch given the market has been averaging 14.9% per year since this bull market began in early 2009, even though GDP has only been increasing at an anemic 1.48% annual rate during that time.
My 5 year doubling thesis also means that we won't see another recession until stocks double again, nor will we see another bear market until stocks double again.
Now let me tell you why. And how to trade it.
Boom and Bust Cycle
We are all familiar with the typical 5 year boom and bust cycle of economic expansion and contraction.
In the past, following a recession, the economy would grow by over 3-4% annual GDP, and a new bull market would begin. As the recovery would take hold, gains would accelerate, and excesses would get built up in the economy.
With that, inflation would rise, thereby prompting the Fed into a series of interest rate hikes to cool things down.
Ultimately, the economy would slow, then fall into contraction, and a recession (along with a bear market) would ensue.
Excesses are wrung out, inflation subsides, and the economy is eventually reset.
Growth reemerges, and the whole boom and bust cycle repeats itself once again.
More . . .
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Things Changed After the Recession of 2007-2009
When the economic recovery (and stock market recovery) began in March of 2009, GDP grew at an abnormally slower pace.
This prompted the now famous 'new normal' line that characterized this post-recession recovery.
Hearing this, I hypothesized that the traditional 5 year boom and bust cycle would be replaced with something far different.
Since we were growing at a significantly slower pace, I concluded that the 'boom' cycle would be elongated to 7-10 years, while the following 'bust' cycle would be shallower in depth and shorter in duration, given that there would be fewer excesses or inflation to wring out.
And I think this theory has played out perfectly so far.
The current boom cycle has been going on for 8½ years. And in that time, the S&P has gained more than 265% from its low on March 6th, 2009 to its close on August 24th, 2017.
And while GDP has finally started to kick into gear, clocking in at 2.6%; inflation is still below 2%; and interest rates (Fed Funds rate) remain near their historic lows at 1.00-1.25%.
The Great Non-Recession of 2016
In mid-2015 and early 2016, the economy did slow down a bit, and the market pulled back from its highs at that time.
After rallying for more than 6 years up to that point, many were expecting a recession to finally hit, and a bear market to unfold. "We were due", they'd say.
But I knew better.
In fact, from the highs on 5/20/15 to the correction lows on 2/11/16, the market had retraced by -15.2%.
It was a painful correction, but stopped well short of bear market territory.
GDP also slowed down, coming in at just 0.9% in Q4'15, and 0.8% in Q1'16. But that too stopped well short of a recession, which is defined as two consecutive quarters of back to back negative GDP growth.
Now, in all honesty, I can see how some in the recession/bear market crowd got fooled.
During that time, we actually saw an 'earnings recession' as some would call it. The economy wasn't contracting, but earnings growth for companies in the S&P were. For five quarters, beginning in Q2'15, we saw negative earnings growth. (Although, it should be noted that much of that was centered in the energy sector as the price of oil plunged, ravaging profits of oil companies along the way.)
Some expected an economic recession to follow, but there was no reason for that to happen.
The economy continued to expand; inflation was nowhere in sight; interest rates remained near record lows; while consumer confidence tracked near record highs.
Theory Becomes Fact
My then theory of an elongated expansion has now become fact.
The second part of that theory was that any contraction or slowdown would be shallow and shorter in duration because there would be no excesses to wring out and no real inflation to contend with. That too has played out perfectly.
One could even make the argument that the short-lived earnings recession back then took the place of a typical economic recession. And the short-lived market correction back then took the place of a typical bear market as well.
Plus, one look at a chart of the S&P and you could see that the market was simply tracing out an overdue pullback to its long-term trendline that had supported this bull market throughout its entire run.
With all of the fundamental and technical evidence at hand, it was clear the economy and the market were getting ready for a whole new leg up.
And a new leg up is what we've seen as the market resumed its powerful uptrend resulting in a series of new all-time record highs.
Now, because the economic expansion has lasted for so long, and the present bull market has become the second longest bull market in history, some are still wondering when the next recession is coming and if a bear market is around the corner.
But those scenarios were never credibly on the table back then. And they certainly aren't on the table now.
And that brings us to today, and why I think the market will double before any of that ever happens again.
Transformational Growth That Will Double the S&P
It's no secret that the market has been reenergized this year on the Trump administration's pro-growth agenda, which includes the highly anticipated corporate tax cuts.
The plan is to reduce corporate taxes from their current 35% rate, to as low as 15%.
That would put corporate taxes at the lowest level in 80 years, going all the way back to 1936.
Moreover, the administration is also expected to include incentives for companies to repatriate accumulated profits from overseas (estimated at more than $2.5 trillion dollars) with an even lower 10% tax rate.
And what will businesses do with all of those profits?
There's no doubt some of that will go to stock buybacks. But with the US suddenly becoming one of the most business friendly countries in the world, you will see massive new corporate investment.
This includes relocating foreign operations back to US soil; building new plants to expand; and the purchase of new equipment and technology to see it all through.
All of this economic activity means more new jobs. And with more jobs comes a stronger consumer, which means more consumer spending. That, of course, is good for business, and the whole virtuous circle is reinforced.
These tax cuts alone could usher in decades of new prosperity.
And it should be noted that these aren't one-time stimulus packages that provide only temporary incentives and modest economic benefits.
We're talking about transformational growth due to long-term structural changes in how companies do business in America.
Subpar to Supercharged
Instead of the subpar 1.5-2.0% annual GDP that the market has been struggling to achieve over the last 8 years, the economy is expected to double that pace to 3-4%.
But even with the weaker than normal economic pace we have been going through, the market in just the last 5 years has produced a total compounded return of 98.2%.
So it's not hard to imagine that if GDP were to double, earnings would soar, and stocks could easily gain another 100% over the next 5 years, and likely a whole lot more!
And let's not forget the other pro-growth benefits from slashing onerous regulations that have stifled business, the proposed $1 trillion in infrastructure spending, a 10% increase in the military budget, and the individual tax cuts that are on the way as well.
Quite frankly, given all of the above, I think the gains could be far more reaching.
And that makes the prediction of doubling the stock market a very doable thing.
As mentioned earlier, the current 8½ year bull market, which has already gained more than 265%, is now the second longest bull market in history.
What's the longest?
Between December 1987 and March 2000, the market rallied for 12.3 years, gaining 582% along the way.
We're less than 4 years away from surpassing that. And I think we most certainly will, and more.
Positioning Yourself for Record Gains
The best way to maximize your returns, not only for the rest of 2017, but for the next 5 years and beyond, is to focus on proven, profitable strategies.
You want to be sure you have the highest probability of success to capitalize on what could become the most dynamic part of this record bull market.
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, stocks with a Zacks Rank #1 Strong Buy have beaten the market in 24 of the last 29 years with an average annual return of 25.3%. That's nearly three times the S&P. But when doing this year after year, that can add up to a lot more than just three times the returns.
But with over 200 stocks assigned a Zacks Rank #1 at any given time, you still need a way to get that list down to the best 5-10 stocks that you can buy.
Here are a few of my favorite strategies that performed spectacularly well last year, are easy to trade, and are poised for big gains again this year.
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 17 years (2000 thru 2016), using a 1-week rebalance, the average annual return has been 55.6% vs. the S&P's 4.2%. It was up 70.7% in 2016. And so far this year (thru 8/18/17), this strategy is already up 53.1% (more than 5.4 x the market).
New Highs: 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 17 years (2000 thru 2016), using a 1-week rebalance, the average annual return has been 52.5%. It was up 95.5% in 2016. And so far this year (thru 8/18/17), it's already up 33.0% (more than 3.4 x the market's returns).
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 17 years (2000 thru 2016), using a 1-week rebalance, the average annual return has been 61.0%. After beating the market again in 2016, it's already up this year (thru 8/18/17), a whopping 78.5% (more than 8 x the market).
The best part about these strategies (aside from the returns) is that all of the testing has already been done. There's no guesswork involved. Just point and click and get your list of the best stocks for the week.
Roadmap to Success
Given the performance of the strategies above, the market may not even need to double in order to double your returns. And we probably don't even need five years.
But there's no doubt we are in the midst of history being made. And with it should come historic returns.
As you can see, there's a clear roadmap to success to help you double your stock returns. No need to reinvent the wheel. The path has already been created. Now it's just about doing it.
And just like anything, it only requires a few simple steps to get the ball rolling.
Where to Start
There's a simple way to add a big performance advantage to your 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 without attending a single class or seminar. Do it online in your own home at your own pace. It covers the investment ideas I just shared and guides you to better trading step by step.
You'll quickly learn how to tilt the odds of success in your favor using the system that, since 1988 has beaten the S&P 500's average yearly gain more than 2X over. Discover how to identify what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them for maximum gains no matter where the market is headed. The course also includes some of our best-performing strategies like the ones mentioned above and more, (including one that gained +153% last year). It also shows you how to create and test your own strategies.
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Thanks and good trading,
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He developed many of Zacks' most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.