The Bull Market: Stronger Than Ever

The recent solid gains in the U.S. stock market are a promising sign for investors. According to Bank of America research, after hitting the bear-market low, the market has risen on average by 9% over the next year 92% of the time. While there are never any guarantees, this statistic provides some reassurance to those currently invested in the stock market.

Furthermore, it seems that the U.S. economy is poised to avoid a recession. Those who have been predicting a downturn keep pushing back their timing, but they remain unconvinced. Their latest argument is that consumers will soon exhaust their excess savings and slow their spending, thereby killing growth.

However, the numbers do not support this hypothesis. Consumers still have plenty of spending power. To illustrate this point, Ed Yardeni of Yardeni Research notes that baby boomers alone have $74.8 trillion in net worth, and they are actively spending it. The total net worth for all U.S. households is $140.6 trillion.

Furthermore, employment remains strong and shows no signs of letting up. According to Moody’s Analytics economist Mark Zandi, “The U.S. economy remains admirably resilient, and odds of a recession beginning this year are receding.” Zandi goes on to stress that the job market is the clearest indicator of this resilience, with job growth remaining steady at nearly 250,000 per month. It is difficult to imagine a recession taking place without significant job losses.

Beyond that, consumers have a record $7.6 trillion in unearned income from interest, dividends, rents, and Social Security. Consumer loan delinquencies are low, and debt-servicing costs are contained relative to income.

All of these factors suggest that the bull market is looking stronger than ever. As an investor currently overweight in stocks, it is certainly reassuring to have history on my side.

Market Signs Show No Recession in Sight

The stock market is one of the most reliable indicators of economic performance. Recent market data, particularly related to cyclical industries such as tech, consumer discretionary, materials and industrials, suggests that a recession is unlikely.

These groups have outperformed defensive areas like consumer non-discretionary and utilities since the lows in October. Current valuations might not be low, but they are in line with historic trends during profit recessions. In the past, the S&P 500 had higher multiples during both the Great Financial Crisis and the Covid recession selloff. For over 50 years, the average multiple on trough earnings has been 20.

Furthermore, removing the “Nifty 50” stocks reveals an even lower P/E ratio for the S&P 500 of just 15. That’s one standard deviation below the benchmark’s historical average multiple of 18.

While valuation is never a catalyst, it does offer useful predictive power. The current multiple suggests a return of 5.4% annually over the next decade based on history. With these indicators, it seems like there’s no recession in sight for the market.

As the year progresses, inflation is finally starting to recede in the United States. Goods inflation rose just 0.6% year-over-year in May, the lowest since November 2021 and a significant drop from its peak of 14.2% in March 2022. However, services inflation is still a concern as rent increases play a significant role in the core CPI inflation, which has remained at around 6% since early last year. Rent accounts for 43% of core CPI.

Fortunately, leading indicators are showing that the impact of rent on inflation is about to decrease soon. The most recent leases are pointing towards this change. As a result, overall U.S. inflation could be down to 3%-4% by this fall, predicts Yardeni. Historically speaking, after significant spikes in inflation, inflation comes down just as fast as it went up.

In terms of investing, it is usually wise to be a contrarian and bet against the crowd because groupthink is so often wrong. Despite investor sentiment coming up since last year’s low, it is still bearish enough to suggest that the U.S. market remains a solid buy-in. As a copywriter and investor, it is essential to follow the right sentiment indicators to make informed decisions. I follow many sentiment indicators but recommend Investors Intelligence Bull/Bear ratio for those who need to follow only one. This metric measures sentiment among stock newsletter writers, and currently stands at a favorable ratio of 2.72, showing that although it has increased since October 2022, there is still a bearish enough trend to indicate that it is time to invest in the market.

Stock Market Analysis: Navigating Bull Markets

As a professional stock market analyst, I have found that the gauge hitting 4.0 signals that it is time to dial back on adding new positions. When the gauge reaches 5.0 or higher, it is best to move towards a cash position, indicating a bull market. However, at 2.72, we are still far from the warning track. This confirms that the ‘wall of worry’ in the market is intact, which is essential in owning stocks. According to market lore, bull markets climb a wall of worry. It means that there are enough investors turning bullish and investing money into stocks to drive them higher.

A similarly comforting read comes from Bank Of America’s “Sell-Side Indicator.” This tool tracks the sentiment of sell-side strategists at brokerages, considering their suggested portfolio allocation to stocks. Recently, this measure was at 52.7%, similar to levels observed during the Great Financial Crisis. When the indicator stays at this low level or lower, subsequent 12-month S&P 500 returns have shown a positive trend 94% of the time. Thus, this level ensures market returns of around 16% over the coming year.

Top Stocks to Watch

In bull markets, companies that make money in market-related activities tend to do well. Recently, there has been bullish insider buying in Nasdaq (NDAQ), Hennessy Advisors (HNNA), and late last year in CME Group (CME). These are three stocks worth considering.

Additionally, cyclically minded stocks that outperform during periods of predictable economic growth have been showing strength and are set to continue trending positively in multiple sectors, namely, tech, consumer discretionary, industrials, and materials sectors.

Energy Sector Presents Buying Opportunity

The energy sector is currently trading at historically low valuations, making it an attractive buy. Despite the market rally, these stocks have not participated and are primed for growth. The average forward price-to-earnings multiple for energy stocks is currently 9.8, compared to the historical average of 16.8.

While many investors are eager for renewables to replace fossil fuels, it will take time for this transition to occur. In the meantime, economic growth will continue to drive energy demand and push these stocks higher.

Several energy companies have seen recent insider buying, including Occidental Petroleum (OXY), Comstock Resources (CRK), and Matador Resources (MTDR). Warren Buffett has been buying significant amounts of OXY stock and is considered an insider due to his ownership stake. CRK is a natural gas play that stands to benefit from the development of liquid natural gas facilities in the US over the next few years.

Small-Cap Stocks: The Stock Market’s Undiscovered Nuggets

In addition to the energy sector, small-cap stocks offer a compelling investment opportunity. According to a small-cap fund guru, these companies are often overlooked by larger investors despite their potential for significant growth.

5 Stocks Under $5 To Catch The Small-Cap Rally

Investors looking to capitalize on the small-cap rally should consider these five stocks trading under $5. As optimism returns to the market, these companies are poised for substantial growth.

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