Why Stocks Are Poised To Finish The Year Strong

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Kevin Matras - Editor

Why Stocks Are Poised To Finish The Year Strong

By: Kevin Matras
Movember 18th, 2023

Stocks have been surging over the last 3+ weeks with the Dow up 7.80%, the S&P up 9.63%, and the Nasdaq up 12.2%.

After a rip-roaring rally for the first 7 months of the year (January thru July), stocks then closed lower for the next 3 months in a row (August, September and October), before exploding higher once again.

Sadly, too many people were caught flatfooted and missed the recent rally after getting spooked out of the market during that 3-month correction.

But there was nothing unusual or ominous about the correction we saw. It was just like any other run-of-the-mill pullback or correction.

For reference, a 'pullback' is defined as a decline between -5% and -9.99%. And a 'correction' is defined as a decline between -10% and -19.99%.

At its worst, the Dow pulled back by -9.02%, while the S&P corrected by -10.3%, and the Nasdaq by -12.3%.

But it's important to know that pullbacks and corrections are common.

Every bull market has them.

In fact, stocks usually pull back roughly 3-4 times per year, while corrections take place on average of about once a year.

Granted, pullbacks and corrections are never fun when they're happening. But if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.

Statistical Trends

Some have been surprised at how well the markets have performed this year. And when they corrected, thought this was the time for things to fall apart.

But it wasn't. The market is back to its winning ways. And looking like it's getting ready to put in a monster Q4 rally. 

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.

For one, 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.

As for the remainder of the year, it should be known that Q4 is typically the best quarter of the year.

Moreover, history shows if the market is up more than 10% thru July (which it was), 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%).

So, the odds were heavily favoring a bull market this year.

And they are excellent for a big Q4 rally.

Bull Markets

As you know, all of the major indexes are in a bull market.

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.

Continued . . .

Peak Inflation Is Behind Us

Last week's 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 4.0% y/y. That's down from last year's summer high of 6.6%.

The core PPI (wholesale inflation) is at 2.4% y/y, also down from last year's summer peak of 8.2%.

And the latest Personal Consumption Expenditures (PCE) index (the Fed's preferred inflation gauge), showed inflation at 3.7% y/y, 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). After pausing on rates for two meetings in a row, there's a growing likelihood that they may pause yet again when they meet on December 12-13, and possibly call it quits.

While nobody is calling for the Fed to lower rates this year, the Fed itself is suggesting they could lower rates by -50 basis points next year, bringing the Fed Funds rate down to a midpoint of 4.88%.

But UBS came out with a report on Tuesday forecasting the Fed will cut rates next year to a target range of 2.50% to 2.75% (midpoint of 2.63%). That suggests interest rate cuts of -2.75%.

That remains to be seen. But their estimates for deep interest rate cuts of -2.75% is likely making people think that the Fed's forecast for a -50 basis point cut has much more to go.

Either way, rates ceasing to go higher, and beginning to go lower next year, 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 1½ more months left in the year, but the Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q4 GDP to come in at 2.0%.

That comes on the heels of Q3's blistering 4.9% growth rate, following 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 (which is nearly over), 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 2.0% with earnings up 2.0% as well. Q1 of 2024 is expected to show sales up 4.1% with earnings up 5.0%. And Q2 is expecting sales to be up 10.7% with earnings up 4.5%.

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 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 midnight Saturday, November 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,

Kevin Matras - signature

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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