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After a rocky start to the month, stocks are back on the upswing. September is historically a tough month. In fact, it's known as the worst month of the year for stocks. But not catastrophically so. Going back nearly 100 years, the average loss for the S&P is only 1.2%. And it's only down 56% of the time. However, that sets up an even better statistic, which is Q4 historically being the best quarter of the year. Since 1950, the S&P has increased in the last 3 months of the year by more than 4%. And it's up 80% of the time. So, if we see any more weakness this month, I'd be looking for places to buy rather places to sell. Because the stats suggest a sizeable move up to follow. But if stocks end up breaking out to the upside this month, I'd be buying on strength just the same. And with interest rates likely being cut next week (and an interest rate cutting cycle likely to continue well into next year), that also bodes well for the market, as stocks typically do well when interest rates are lowered. As spectacular as this year has been so far, it looks like we're getting ready to finish the year on an even stronger note. And there's plenty of reason to believe the market is entering a new phase that could extend this bull market rally to a whole new level. Market Rotation Large-cap tech/AI dominated stocks (the largest ones often referred to as the Magnificent 7), had been leading the market for most of the year. Those stocks had been the key drivers of the rally. And it sent the market-weighted S&P 500 and tech-heavy Nasdaq to new heights. In the first half of the year, the S&P was up 14.5%, with the Nasdaq up 18.1%, all while the neglected small-cap Russell 2000 only added 1.02%. Mid-caps also lagged, gaining just 5.34%. And even the Dow trailed with only 3.79%. The Magnificent 7 (or Mag 7) is comprised of 7 of the largest stocks by market-cap, which are: Apple, Microsoft, NVIDIA, Alphabet (i.e. Google), Amazon, Meta, and Tesla. As you know, the S&P is a weighted index, so the largest stocks have their gains amplified due to their higher weighting. And those 7 stocks had an oversized impact on the market's returns. For the first 6 months of the year, the Magnificent 7 made up 59.5% (just under 60%) of the S&P's gains. To put this into perspective, the full market-weighted S&P was up 14.5% in the first half. But if you take out the Mag 7, the S&P would've only been up 5.86%. Pretty amazing. You can also see the over-influence of those stocks (and other large-caps) on the market-weighted index, when you compare it to the equal-weighted S&P. There, each stock is weighted the same as the others, large and small alike. And for the first 6 months of the year, the equal-weighted index was up just 4.10% to the market-weighted 14.5%. Stark difference. But a market rotation is underway and it should allow for a big game of catch up for the ignored small-caps, and even other well-deserving mid-caps and large-caps. Market rotation is just what it sounds like - investors rotate out of some stocks and into others. And since large-cap tech/AI dominated stocks have been the biggest movers, that would suggest a rotation out of those stocks, and into other stocks worthy of investor dollars that have been largely ignored. Continued . . . | ||||
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| Breadth Expansion But I don't see this market rotation as a wholesale dumping of large-caps or the AI trade. Just a lessening of the over-concentration in those names. Especially after the monster-gains they've seen. That trade has worked so well for a reason — and it's because the AI boom is real, and is supported by real earnings, and real growth potential. And AI is shaping up to be just as transformative, if not more so, than the personal computer, the internet, and the mobile phone. And it's expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives. So, I don't see investors shunning those stocks completely. Not by a long shot. Nor should they, as it would be a terrible long-term mistake in my opinion, as the AI boom is a multi-year phenomenon. And that's why the S&P and Nasdaq are heading back up. But so are the other indexes. That's because this rotation is more like a bull market breadth expansion. True, some money may be coming out of large-caps in favor of smaller names, and some money may be coming out of big-tech in favor of other industries. But the point is, it looks like the bull market is entering a new phase — by including many more stocks and many more industries. It should lift the small-cap index, the mid-cap index, the Dow, and even continue to lift the Nasdaq and the S&P 500 as the other stocks in those indexes will get a chance to benefit more broadly as investor dollars start giving those more attention. And that's very bullish for the market. In addition, there are plenty of other reasons why the rest of the year is shaping up to be a historic one. Cyclical Trends And Other Statistics Benefitting The Market The 4-year Presidential Cycle shows that year 4 (that's this year), is the second-best year of all four years (second only to year 3 (last year, when the S&P gained 24.2%), which is the best year of all 4 years). This is a powerful recurring cycle. And historically, it's amazing to see how favorable this is for investors. Additionally, even though we are in the midst of a strong bull market which has seen a series of new highs after new highs, the market prior to that had gone 24 long months without setting a new high even once. And it was only in January of this year that we finally eclipsed the previous all-time highs from January 2022. I point this out because history shows in the previous 14 times when the S&P has gone at least a full year without a new high, and then finally made one - a year later it was higher in 13 out of those 14 times, and up nearly 15% on average. Another interesting statistic, which points back to the big gains we saw in November of last year, bodes well for more gains to follow this year. Once again, history shows that when the S&P was up by more than 8% in a single month (November 2023 was up by 8.91%), (this has happened 30 times since 1950), a year later the index was higher in 27 out of those 30 times (that's 90% of the time), with an average return of 15.8%. Pretty compelling stats. It also sets a bullish tone for all of the other factors working in the market's favor this year. Inflation Continues To Decline, Interest Rate Cuts Expected Soon Last week's better-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) reports show that inflation continues to ease. Core (ex-food & energy) CPI (retail inflation) is now at 3.2% y/y, while core PPI (wholesale inflation) came in at just 2.4%. While progress on inflation had slowed earlier in the year, the last couple of months of reports have shown that inflation is back on the decline. So much so that the Fed is widely expected to begin cutting rates next week when they meet on 9/17-18. Fed Chair Jerome Powell has said the economy has made "considerable progress" on inflation, while maintaining a "strong, but not overheated" jobs market. He also noted that you don't have to wait until inflation hits 2% before cutting rates (otherwise, you've waited too long). You just need the confidence (backed by data) that it's on its way to 2%. While lower interest rates are likely to help businesses of all sizes, they should have a bigger impact on smaller-cap companies, and help increase profit margins. And since the market is forward-looking, traders are not waiting for the first rate cut to actually take place. Simply 'knowing' that cuts are right around the corner has ushered in a sense of urgency to get positioned before they happen. Moreover, there's plenty of talk on what the Fed's terminal rate will be. That's the Fed's ultimate interest rate level to hit before they end their rate cutting cycle. Some expect the Fed to cut 1%, others 1.25%, and still others 1.5% (and more). That would put the Fed Funds midpoint (currently at 5.38%), at between 4.38% to 3.88% (or lower) before all is said and done. I should also note with rate cuts looming, you're also likely to see a rotation out of money market funds too, and into a wider selection of stocks as well. The Outlook Is For Growth A few months ago, the International Monetary Fund (IMF) raised their global growth forecast to 3.2%, up from January's forecast of 3.1%. They also gave the U.S. the biggest upside revision, upping their growth forecast to 2.7% from their previous estimate of 2.1%. The Eurozone saw a slight downward revision, but is still expected to grow by 0.8% from the previously expected 0.9%, while China is expected to grow by 4.6%, and India is expected to increase by 6.8%. But the IMF specifically singled out the U.S. as being a major driver of global growth this year. And a growing economy goes hand in hand with a bull market. Moreover, personal incomes are hovering near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending. And that helps fuel corporate profits. Q3'24 earnings are expected to be up 3.9%, and sales up 4.4%. Q4'24 earnings are expected to be up 10.5%, and sales up 5.3%. Q1'25 is expected to show earnings up 13.1%, and sales up 5.2%. And Q2'25 is expected to show earnings up 14.3%, and sales up 5.8%. The earnings picture is one of improvement, and another bullish indicator underpinning the market. Stocks Are Undervalued Let's also not forget that valuations are down. While the P/E ratio for the S&P has risen from their lows, they are still down sharply from 2021's peak, and are below where they were the last time stocks were anywhere near this level. And that makes stocks a bargain. Then when you factor in the increasing earnings estimates just mentioned, stocks look even more undervalued. 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 36 years (an 81% 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 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 36.3% vs. the S&P's 7.0%, which is 5.2 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 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.9%, beating the market by 6.4 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 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.7%, which is also 6.4 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 +62.6% in 2023 while the S&P 500 gained +26.2%.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, September 14, 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 individual strategies mentioned herein represent only a portion of the ones covered in the course. 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 August 5, 2024. 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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