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Ever since the markets put in their key upside reversal on October 13 (just 5 months ago), stocks have been on a tear. Even after February's pullback (following last month's hotter than expected inflation readings), and last week's banking scare, the major indexes are up still up sharply since those lows were put in, with the Dow up 10.9%, the S&P up 8.80%, the Nasdaq up 11.9%, and the small-cap Russell 2000 up 5.48%. What prompted the turnaround back then? After 3 quarters in a row of falling stock prices, and endless stories of doom and gloom, it appeared as if all of the bad news had been priced into the market. And now it was time to go higher. The recession had ended (after GDP fell in Q1 and Q2 of last year, Q3 was up 3.2%. It's no longer a recession when the economy starts growing again), and Q4 was looking up as well (we now know it was up 2.7%). And higher the market went. The market continued to rally in January. But hit the pause button in February. Last week, however, it appeared to hit the brakes. But did it? The bank implosion (and closure) of Silicon Valley Bank, and then Signature Bank, spooked the market with small and mid-sized banks tumbling. But after the Fed came out and said they would backstop all those depositors, the market bounced back up. On a side note, some have made comparisons to the Savings and Loan crisis in the late 80's, and the sub-prime mortgage crisis that took down banks in 2008. But a closer look would show they are nothing alike. For one, unlike past banking crises, SVB didn't overly invest in risky assets. To the contrary, they invested in arguably the safest investments on the planet - U.S. Treasuries. But they invested an overly large portion into long-dated Treasuries (when prices were at their highest and yields were at their lowest), and didn't adequately plan for what they would do when interest rates went up and business slowed. When their primary business model of funding startups waned, and investor dollars dried up, they found themselves in a cash crunch when their clients needed funds. SVB was well capitalized. But all that money (more than enough to meet customer demands), was tied up in long-dated (illiquid) assets. And they were forced to sell some of those Treasuries at hefty losses. (Again, those were not risky assets - those were safe, stable investments backed by the U.S. Government - and had they been able to hold them until maturity, they would have had zero losses and only gains.) Word of those losses spooked depositors and investors. SVB then made the decision to do an equity raise to ease their liquidity problem. But that led to a credit rating decline, which then led to a panic-induced bank run, and their eventual closure. This is why many analysts are saying this does not compare to the aforementioned crises. Plus, big banks are in strong financial shape. One could still point to SVB as making some poorly thought-out decisions. But throughout all of this, they had a ton of money. Just not in a place they could readily access it. A night and day difference between the current situation and the S&L and sub-prime mortgage debacles of previous years. Nevertheless, the markets tanked as investors panicked. But we all know that panic usually leads to extremes and mistakes. And I would not be surprised to see Monday, March 13, be the low of the recent pullback. Pivotal lows usually correspond with a crescendo of fear. And I would say that's precisely what we got as the SVB collapse came to a head. Now the market can get back to focusing on inflation, interest rates, and the economy. And that should lead to more gains to come. The Outlook Is For Growth The recession of 2022 has come and gone. And nobody is seriously talking about a recession anymore. How could they with Q1 GDP expected to come in at 2.6%, and the strong labor market continuing to impress? The recession is clearly behind us. And the outlook is for growth. But what about inflation, and therefore, interest rates? Have We Finally Seen Peak Inflation? Tuesday's Consumer Price Index (CPI), and Wednesday's Producer Price Index (PPI), both confirm that peak inflation is behind us and that it continues to moderate. The latest CPI report showed headline inflation at 6.0% y/y, while core inflation (ex-food & energy), was at 5.5%. That compares to last month's 6.4% headline number, and 5.6% core rate. Moreover, that's an even bigger decline from last year's summer highs of 9.1% (headline), and 6.5% (core). That was further underscored by the latest PPI report, which put the headline number at 4.6% y/y vs. last month's 6.0%, and the core rate at 4.4% vs. last month's 5.4%. That too is an even bigger decline from last year's peak inflation rates of 9.8% (headline) and 8.2% (core). Of course, inflation is still too high. And the Fed is not likely to be done raising rates just yet. But they do appear to be nearing the end of their rate hike cycle. When the Fed next meets on March 21-22, they are expected to raise rates by another 25 basis points. But gone is the speculation that they'll raise by 50 bps. In fact, even the 25 bps is not a done deal. One analysis at Goldman Sachs recently said he is no longer expecting the Fed to raise rates at all at the next meeting. As for the terminal rate, that too might be cut short. In December of last year, the Fed hinted that the terminal rate might get as high as 5.1% before calling it quits. Although, just last week, Fed Chair, Jerome Powell suggested rates could go "higher than previously expected." He did not define what that meant. But since then, others have lowered their expectations. At the moment, the latest estimates have the terminal rate getting to a range of 4.75%-5.00% (midpoint of 4.88%); or to a range of 5.00%-5.25% (midpoint of 5.13%); or to a range of 5.25%-5.50% (midpoint of 5.38%). With the midpoint currently at 4.63%, that would require just one more 25 bps rate hike to get to 4.88% (which means one more hike on March 22, and that's it); or two more 25 bps hikes to get to 5.13% (one in March, and one more in May); or possibly as many as three more 25 bps hikes to get to 5.38% (one in March, May and June). Either way it would appear we are closer to the end than not. And that's bullish for stocks. More . . . | ||||
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| Are Stocks Undervalued? Let's also not forget that valuations are down. In fact, the P/E ratio for the S&P is trading at multiyear lows, and below its five-year average. And that makes stocks a bargain. Of course, if earnings drift lower, valuations will become higher. But there's plenty of room for stocks to remain relatively cheap. And the earnings outlook is still forecasting growth. In fact, this past earnings season, which just wrapped up, once again, came in better than expected Seasonality Is On The Market's Side Also in the market's favor are the seasonals. And they look great this year. For one, the 4-year Presidential Cycle shows that year 3 (that's 2023), is the best year of all 4 years. And historically, it's amazing to see how favorable this cycle is for investors. Since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%. So, we are literally still at the beginning of one of the most bullish periods for the market. Moreover, history shows a high probability of outsized gains following a down year for the market. The S&P was down by -19.4% last year. It was the first down year since 2018, and the worst down year since 2008, when it closed lower by -38.5%. (For those wondering, 2009 was up 23.5%.) And there's plenty of reason to believe we could see something like that again this year. If you are thinking there's more upside to go, the recent pullback could be the best buying opportunity for 2023. Do What Works So how do you fully take advantage of the market right now? By implementing tried and true methods that work to find the best stocks. 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% 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 the best 5-10 stocks that you can buy. Proven Profitable Strategies Picking the best stocks is a lot easier when there's a proven, profitable method 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. Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success. Here are a few of my favorite strategies that have regularly crushed the market year after year. 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 23 years (2000 through 2022), using a 1-week rebalance, the average annual return has been 38.7% vs. the S&P's 6.2%, which is 6.2 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 23 years (2000 through 2022), using a 1-week rebalance, the average annual return has been 46.4%, beating the market by 7.4 x the returns. 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 23 years (2000 through 2022), using a 1-week rebalance, the average annual return has been 49.5%, which is 7.9 x the market. 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 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 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 up to +15.6%, +38.9%, and even +39.7% in 2022 while the S&P 500 lost -18.2%.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 Saturday, March 18, unless we run out of books first. If you're interested, I encourage you to check this out now. Find out more about Zacks Method for Trading: Home Study Course » Thanks and good trading,
Zacks Executive VP Kevin Matras is responsible for all of 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. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through February 6, 2023. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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