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September has finally come to an end, and it couldn't have come soon enough. It was a rough month with the Dow down -3.50%, the S&P down -4.87%, and the Nasdaq down -5.81%. But aside from September's poor performance, stocks have been on a tear this year. In fact, YTD, even with the recent pullback, the Dow is up 1.09%, the S&P is up 11.7%, and the Nasdaq is up 26.3%. Some have been surprised at how well the markets have performed this year. But they shouldn't be. For one, there's a host of reasons why stocks soared this year, and why they should continue to do so. But all one had to do was look at the statistical trends to see the odds favored a strong rally this year. In particular, the 4-year Presidential Cycle 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%). Additionally, 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 finishing in the green). Pretty compelling stats to say the least. Unfortunately, September's performance may have soured some investors on stocks in general. But don't let it. The statistical odds remain in the bullish camp. Even more so for the last 3 months of this year. And that's because history shows if the market is up more than 10% thru July (the S&P was up 19.5%), and August is down (which it was), the remainder of the year is up 100% of the time with an average gain of 9.9% (median of 8.7%). With September's down month, the S&P is going to have to climb roughly 5% just to get back to where we were at the end of August. And if it's going to match the historical averages (or median) listed above, that's another nearly 9% to 10% on top of that. So, the odds are excellent for a big Q4 rally. And Q4 begins next week. Bull Markets As you know, all of the major indexes are in a bull market. The small-cap Russell 2000 was the first one to exit last year's bear market and enter a new bull. And they did so in August of last year after closing higher by 20% from their bear market low close. The Dow was next in late November of last year. The mid-cap S&P 400 exited their bear market in late January of this year. The Nasdaq ended their bear market and started a new bull in May. And the S&P 500 joined the party in early June. This is important to know because the stats of what happens after a bull market begins are worth pointing out. In a study of the top 10 bear markets (using the Dow), the rallies that followed have been spectacular. Within a year after a bear market, stocks surge on average of 44.7%. And go on to gain an average of 66.3% by year 3. And following the biggest bear market in that study (10/2007-3/2009 during the housing/financial crisis, aka the Great Recession), the market gained 63.4% in year 1; 100.6% by year 3; and 153.6% by year 5. Those are portfolio transforming moves. And you don't want to miss out. So Why The Pullback? The recent pullback from the summer highs was tough. But pullbacks like these are very common and healthy. Every bull market has them. In fact, stocks usually pull back about -5% roughly 3-4 times per year. (A pullback is defined as a decline between -5% and -9.99%.) And pauses like these help refresh and strengthen the market before their next leg up. While pullbacks are never fun when they're happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell. Continued . . . | ||||
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| Peak Inflation Is Behind Us The latest Consumer Price Index (CPI) and Producer Price Index (PPI) inflation reports confirm that inflation is on the decline. The core (ex-food & energy) CPI (retail inflation) is currently at 4.3% y/y. That's down from last year's summer high of 6.6%. And the core PPI (wholesale inflation) is at 2.2% y/y, also down from last year's summer peak of 8.2%. Friday's Producer Price Index (PPI) (the Fed's preferred inflation gauge), showed inflation at 3.9% y/y, down from last month's 4.3%, and down from last year's peak of 5.3%. Moreover, the Fed's latest forecast is for core PCE to fall to 3.3% by year's end, and 2.5% in 2024. With inflation on the decline, the Fed has confirmed they are nearing the end of their rate hike cycle (if they haven't already hit it). They left open the possibility of one more rate hike this year, which would bring the Fed Funds rate to a midpoint of 5.6%. But they are forecasting rate cuts for next year, which would bring the Fed Funds rate down to 5.1% by the end of 2024, and 3.9% in 2025. All of that is bullish for the market. The Outlook Is For Growth At the same time, the Fed has ratcheted up their forecast for economic growth. They now see full-year GDP coming in at 2.1% for this year vs. their previous estimate of 1.0%. And they see growth in 2024 as well. Granted, there's still 3 more months left in the year, but the Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q3 GDP to come in at 4.9%. That's even higher than Q2's 2.1%, and Q1's 2.0%. For those still talking about a recession, it's hard to make a case for that (defined as 2 quarters in a row of negative GDP), when the economy is expanding. Additionally, the World Bank released a report earlier this year, and they increased their global growth rate from 1.7% to 2.1%. Moreover, the OECD (Organization for Economic Cooperation and Development), also released a report where they projected a global growth rate of 2.7% this year, and commented that the global economy is showing signs of improvement. So that 2.1% or 2.7% growth rate could very well be upwardly revised yet again. Turning our attention back to the U.S., it's also worth noting that personal incomes are hovering near all-time highs. And consumer spending remains strong. Important points 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. 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 largely provided reassuring guidance for the coming quarters, with many upping their outlook. One look at the sales and earnings estimates for the S&P, and you can see the expected upward trend of improvement. For example: Q4 of this year is expected to show sales up 3.6% with earnings up 5.3%. Q1 of 2024 is expected to show sales up 4.0% with earnings up 6.7%. And Q2 is expecting sales to be up 11.4% with earnings up 4.9%. An improving outlook indeed. And stocks should follow suit. Do What Works So how do you fully take advantage of the market right now? By implementing proven, profitable 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. 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 Q4 It couldn't be easier to find them. And it's a very good plan to buy them at market open Monday morning. The earlier you get in, the better your chances for maximum profit. Download our just-released Ultimate Four Special Report. These are the 4 stocks hand-picked by our experts to shine brightest this quarter. Each has strong fundamentals and exceptional growth potential. They're ideally suited to soar in current trading conditions. Stock #1: What company is booming in 2023, driving revenues up double digits and earning triple digits while shares are soaring? We're not talking about NVIDIA. Instead, this is a still little-known tech services company that's now a large-cap with 27,000 employees in 130 countries. Stock #2: This home-run scale automotive play has multiple markets from private startups to multinational titans to the world's richest, most influential governments. Total EV sales at 4% of the market in 2020 are projected to reach 50% by 2035. Stock #3: A leader in construction and mining, they've posted inspiring expectations and increasing dividends. From $55 million in revenue during 2021, they soared to $1.66 billion in 2022. From June through September 2023, they've already beaten the S&P 500 6X over. Stock #4: Buy high and sell much higher. Despite the brutal 2022 pullback, this EV and AI giant has delivered earnings surprises 10 quarters in a row, and plans a meaningful buyback in Q4 2023. In the past 9 months, the stock has more than doubled and the party is far from over. What's the cost to see our Ultimate Four stocks? Only $1, and there's not a cent of additional obligation. Plus, you'll get full 30-day access to ALL Zacks private buys & sells with that same dollar. You can be one of the first to see these promising recommendations when you download this Special Report today. But don't delay. This opportunity ends at midnight Sunday, October 1. See our Ultimate Four stocks now » All the best,
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 download our just-released Zacks Ultimate Four Special Report before this weekend's deadline. | ||||
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