Well, folks, this was one of those very difficult days on Wall Street that remind us: The market’s not quite out of the woods yet. While the Nasdaq did break out to new highs just yesterday, stocks as a whole – as measured by the Wilshire 5000 Total Market Index – are about 10% off the February highs.
That being said, it doesn’t have to be a “difficult” market for everyone. I trust that those of us who stick with the highest quality stocks will get through this just fine. In fact, I’m downright excited at the opportunities that are coming our way!
We’ll take a look at some dos and don’ts…but I’d like to take a step back first. Let’s get clear on the context for today’s sell-off, then see what’s really going on here.
On Friday, the market took off on the May jobs report: the official one from the U.S. Labor Department. I warned you in Saturday’s Market360 about the discrepancy in different jobs data. We’ve also gotten the May report from the people processing private-sector paystubs (ADP), and it wasn’t nearly as strong as the report from the people surveying households and businesses (the Bureau of Labor Statistics).
Then today, we got the weekly jobless claims report. Slightly fewer Americans filed for unemployment than expected – but the previous week’s total was revised higher. So, investors got worried again that the economic situation might be worse than reported.
Plus, last week, the Federal Open Market Committee’s (FOMC) June statement was just horrific. Fed economists expect a 4% to 10% contraction this year. That’s 6.5% if you average it out. Then they said the economy’s going to bounce 5% next year.
However, the Fed also clarified what they are going to do about it. They’re going to keep rates at zero through 2022. Each month, they’re going to be buying $80 billion of Treasuries and $40 billion of mortgage backed securities.
The Fed’s intervention is important because last week, Treasury yields spiked. They went from 0.66% on Tuesday to 0.91% at Friday’s close.
That spike upset some investors who own fixed income and dividend stocks. But now that we can expect near-zero rates for two-and-a-half years, it just means: Load up on all the good dividend stocks. The ones I like best are not only increasing their payout, but offer explosive growth to investors, like my most recent buy in my investing services.
Today, the 10-year Treasury’s back down below 0.68%. That’s why you see so much strength in the Dow. It yields more than four times the 10-year, at this point.
Not to mention that the Dow, like my portfolios, does NOT include the stocks that had all the “froth” to begin with.
I don’t want any of the speculative stocks where the company has made no sales, yet the stock is going up because they think they’re going to get orders. Often, these stocks are REALLY going up because of Wall Street speculators!
I also don’t want you to worry – because I’ve been steering you away from these “bubble stocks.” And those are going to take the brunt of it.
Just look at the Nasdaq 100. The fact that TSLA’s in there is a bit scary, because that stock is still very overvalued. That bubble is going to be pricked a bit.
But in the meantime, there are lots of good stocks in the Nasdaq 100. That includes all the cloud computing stocks I recommend; there are cybersecurity stocks that are very good; there are a lot of great semiconductor companies. One would be NVIDIA Corporation (NVDA), the artificial intelligence and graphics chip company.
So, when I look at the market, I’m not too worried overall, because I’m still finding Strong Buys out there.
Now (as I alluded to earlier) one person that is very worried is Fed Chair Jerome Powell. And I see one likely explanation for why he’s just sounded so depressing lately:
Energy prices are going back down as inventories soar. So, if there is a risk to this market, it’s deflation. If we get caught in a deflationary cycle, where prices continue to fall, that will eventually hit asset prices like stocks.
Deflation is a central banker’s archenemy. Right now, the Fed is trying to support the housing market, and you’re going to see 0% car loans out there; all that is designed to fight deflation, by stimulating demand. So, let’s hope the Fed is going to be successful and we don’t have deflation impact our economy. We’ve seen it on the wholesale level and we’ve seen it on the consumer level.
This is what’s going on while the market’s trying to correct. But investing capital is just rotating into quality stocks. And that’s why, for instance, my Platinum Growth Club Model Portfolio is poised to benefit: I recommend stocks with better-than-expected sales and earnings. Not the ones that are getting bid higher as the company goes bankrupt, like JCPenney (JCP) and Hertz (HTZ), which flew 80% higher in a day last week.
But then, when people get spooked, they flee to stocks like mine. And that’s going to continue in the next few weeks. The end of June is the annual Russell realignment…which always brings a “frenzy to a summer Friday,” as The Wall Street Journal put it last year. As I always say, June is also famous for quarter-end window dressing, plus the 90-day ETF realignment that tends to boost our stocks.
As far as I’m concerned, good-quality growth stocks are still the place to be. So are the dividend growth stocks that are increasing dividends (while other companies have to cut them).
I’m very much looking forward to July for all these reasons, and I hope you are, too. If anything, selloffs like today’s are an excellent opportunity to buy great stocks before the market takes off again.