Right now, everyone is fixated on the day-to-day developments. They want to know: How much has the Dow moved today? What’s the price of oil right now? What does the latest report from China say? What is the Fed saying at this exact moment about interest rates? And the financial media does all that it can to ensure that people are clicking, reading and tuning in all day, every day.
Don’t get me wrong; it’s important to have a general understanding of these moving pieces. And given the recent uptick in stock market volatility and the world’s second largest economy struggling to gain momentum, it makes sense to be up–to–date on what’s happening in Wall Street.
However, in reading my inbox, I can tell that the 24/7 news cycle is causing many of you sleepless nights. The fact is fear is a powerful selling point, so all too often the financial media tells the same old doom-and-gloom story.
So, I’d like to step back and expand our time horizon a bit. Let’s look at four long-term forces that will move the market over the next several months.
First, I expect the “seismic shift” out of large multinational companies, which started back in January, to continue. Domestic companies should continue to outperform multinational and commodity-related stocks. Furthermore, the U.S. consumer remains the primary driver of economic growth, and it would take a major economic shift to derail that train. And while consumer confidence did slightly dip at the end of August, I expect this move to be temporary due to the daily market volatility. Overall, consumers remain optimistic about their jobs and income potential.
Second, while it may not seem like it right now, we’re actually entering a historically strong period for the stock market. Typically, in the third and fourth year of a Presidential election cycle, the stock market rallies as candidates run around and make promises to voters. There’s a lot of optimism for what the next President can accomplish during his/her term, and that optimism usually spills into the stock market.
Third, the Goldilocks economy continues to be “not too hot, nor too cold.” So, while many investors remain skittish about the possibility of a rate hike, I do not expect that the Fed will raise key interest rates in September. There are just too many factors that are causing adverse impact to markets right now like global chaos and the strong U.S. dollar, which is brewing more commodity deflation. Fortunately for us, the U.S. remains an oasis for foreign investors seeking comparatively higher interest rates and a strong currency.
Finally, the upcoming third-quarter earnings season is expected to be especially challenging, and there have been a lot of downward revisions for the S&P 500. Fortunately, if you are invested in strong domestic stocks that are characterized by positive analyst earnings revisions, then this upcoming quarter won’t be much of an issue.
The bottom line is that while things look bleak right now, blindly buying up (or unloading) stocks to match the market is not the best strategy. It’s better to own stocks that allow you to beat the market. Specifically, you should be looking for stocks that are characterized by strong sales, even stronger earnings, positive analyst earnings revisions and are trading at near market multiples. Looking ahead to next month, September is known for quarter-end window dressing, so I expect domestic stocks to continue to exhibit relative strength and steadily appreciate.
If you’re interested in learning more about my top large-cap domestic recommendations, you may want to consider a risk-free trial to Blue Chip Growth.