Stocks have been on a tear posting record gains since their pandemic low close in late March.
Since then the Dow has surged by more than 48%, the S&P by 44%, and the Nasdaq by 46% (which made new all-time highs just last week and is positive on the year).
That’s twice what’s needed for a bear market to officially end and a new bull market to begin.
And the best part is that it looks like there’s a lot more upside to go.
History has shown that after bear markets end, the bull market rallies that follow are nothing short of spectacular.
Following the previous bear market of 2007-2009 (during the housing/financial crisis, aka the Great Recession), the market (Dow) gained 63.4% in year 1; 100.6% by year 3; 153.6% by year 5; and more than 357% during the entire 11+ year bull market.
But it’s worth noting that our economy and financial system back then were on pretty shaky ground going into it and that’s what led to the bear market pullback.
A starkly different situation leading up to this one. In fact, the economy was considered the strongest economy of our lifetime with 50-year low unemployment, 20-year high in household income, and near record high in consumer confidence.
Instead, it was a virus outbreak that caused the pullback. But since the U.S. was in such great shape prior to this, that’s why we’re seeing it bounce back so strongly and so quickly now.
Then add in the nearly $10 trillion in monetary and fiscal stimulus (and likely more to come), not to mention near zero interest rates for the foreseeable future, and it looks like stocks are poised to soar even more.
More . . .
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The Great Suppression Is Over
We all knew once the pullback was over that a new bull market was inevitable. History has proven that.
Although, the speed of this bull market has caught many off guard. But it really shouldn’t have.
While the record books are likely to show that we indeed entered an official recession in Q1 and Q2 (two negative quarters in a row are needed for a recession), what we just went thru is more like a suppression than anything else.
Recessions usually come about after a period of expansion. Excesses are built in. Inflation begins to rise. Interest rates go up to combat this. Growth slows, and ultimately contracts.
Then the economy resets. Excesses are wrung out. Interest rates go down. And a new period of growth emerges.
But the recent slowdown was not due to the typical boom/bust cycle described above.
Economic activity was artificially suppressed due to the lockdowns imposed to flatten the virus curve and contain the spread.
But that’s over. And now the economy is reopening.
All 50 states have reopened in some shape or form. Some faster than others. But the reopening continues. And we’re seeing huge pent-up economic demand unleashed.
You can see that in the previous week’s Employment Report which showed 2.5 million jobs gained vs. expectations for -7.7 million jobs lost; this week’s Empire State Manufacturing Survey which came in well above expectations; yesterday’s Retail Sales Report which jumped 17.7% (the biggest monthly gain ever); and the Housing Market Index which surged 56.8%, also the biggest monthly gain ever!
And that’s just for starters.
Q3 GDP is expected to rise an unprecedented 20%, with another double-digit gain in Q4.
And GDP for all of 2021 is expected to grow by 5% (the largest annual GDP growth rate in 38 years)!
This is why stocks are soaring. And why they should continue to do so.
Stocks To Lead The Market
As exciting as this bull market has been, and is expected to be, not all stocks are created equal.
Plenty of stocks have surged to new all-time highs, while others are still stuck near their 52-week lows, if not multi-year lows.
And there will be distinct winners and losers in the subsequent rallies to come.
Of course, there are the obvious.
In the winners column you’ve got online shopping companies, home delivery, telecommuting and videoconferencing software, etc.
In the losers column you’ve got airlines, hotels, brick and mortar retail, and more.
But there are less obvious picks and pans.
Those with the best balance sheets and cash flows will fare the best.
But restaurants, for example, in spite of the reopening, are likely to only return to 75% of their previous levels. And it will likely take the rest of the year to do it as social distancing cuts into their seating capacity.
Companies in the Medical Sector should do well. Especially those focused on Coronavirus testing, therapeutics and vaccines. Abbott Labs, for example, came out with a new test kit that’s expected to add $1 billion in sales. Gilead has seen promising results with their drug Remdesivir. And Moderna reported positive results from a Phase 1 clinical trial for their possible coronavirus vaccine. But it’s becoming a crowded field. There’s plenty of cost to produce all of the above. And not every new product from every company will succeed.
The oil industry had been hit hard as declining demand and overproduction led to a gigantic oversupply. But in all of that carnage, the shipping industry (specifically those that could store crude oil in their tankers) had seen numerous stocks spike up as customers looked to those firms to store their oil.
The point is, there will be huge opportunities in many different sectors as this new bull market unfolds.
Some of the breakout stocks will be tried and true names we all know and love.
And others will be stocks you may never have even heard of before.
That’s because this virus outbreak, and the upheavals it’s brought about for businesses and consumers, will change large portions of our economy. And the companies that can adapt will thrive and become new market leaders. While those that can’t will suffer.
And you need to know how to determine which is which.
Do What Works
The best way to find the new market leaders is to stick with time-tested methods that work.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 26 of the last 32 years with an average annual return of 24.5% per year? That's nearly 2.5 x the S&P with an annual win ratio of more than 81%.
That includes 2 bear markets and 3 recessions.
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 achieving your investment goals.
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.
Proven Profitable Strategies
Picking the best stocks is a lot easier when you focus on proven, profitable strategies to do it.
And 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.
Here are a few of my favorite strategies that have regularly crushed the market year after year, in both good times and bad.
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 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 47.8% vs. the S&P’s 6.0%, which is nearly 8 x the market.
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 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.1%, which is 9 x the market.
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 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.7%, beating the market by 9.2 x the returns.
The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.
Where to Start
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 produced gains of +118.0%, +175.7%, and even +186.7% from 2017 through 2019.
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: The number of copies we have in stock is limited. Your opportunity to get one free ends at midnight Saturday, June 20th, unless we run out of books first. If you're interested, I encourage you to check this out now.
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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.