2020 has been a roller coaster of a year so far, with a lot of literal highs and lows. Now that the second half of the year is officially off and running, today makes for a great time to review the “highlight reel” of the market action in the first half. Let’s get right to it!
The First Quarter:
The stock market roared out of the gates, with the major indices hitting new high after high. However, the rally came to a screeching halt when the coronavirus pandemic hit and countries went on lockdown. As you know, the U.S. was certainly no exception. Fear of economic fallout from the coronavirus caused violent selloffs on Wall Street as investors made a beeline for the exits. The selling was so strong that the circuit breakers were triggered. By mid-March, we were looking down the barrel of a bear market. The S&P 500 ended the first quarter down exactly 20%.
Due to widespread stay-at-home orders to curb the spread of the coronavirus, the U.S. fell into a recession, with more than 40 million unemployed. Overall retail sales fell to record lows; big companies filed for bankruptcy; U.S. crude oil prices briefly turned negative; the 10-year Treasury yielded a record low of 0.40%. First-quarter earnings declined 12.7% and sales dipped 1.3% year-over-year.
That’s a lot in three months!
The Second Quarter:
Fortunately, the stock market bounced back strongly and out of bear market territory. Both the S&P 500 and Dow surged about 40% off their March lows, and the Nasdaq made new records, breaking 10,000 for the first time ever.
Overall, this was a stunning second quarter. The S&P 500, Dow and Nasdaq closed out the quarter with a bang, surging 20%, 17.8% and 30.6%, respectively. This also marks the best quarter for the stock market in more than two decades.
The economic data has also improved immensely and is now indicating that a V-shaped recovery is in the works.
Specifically, retail sales soared a record 17.7% in May, led by a 44.1% surge in vehicle sales. The housing market is recovering, as ultralow interest rates have inspired many Americans to buy or refinance. Applications for new home purchases have increased for 10-straight weeks and are now at a new high. Mortgage applications are also 21% higher than they were a year ago.
Interestingly, the Federal Reserve still expects a U-shaped recovery, and will be keeping key interest rates at ultralow levels through 2022. It’s also enforced capital restrictions on banks after the big banks failed last week’s stress tests.
So, for the third quarter, banks cannot do share buybacks and must limit dividend payouts to shareholders in order to have more cash on hand if the current economic environment worsens. I do not recommend the big banks in any of my Navellier newsletters, so I’m not too concerned about that.
The Second Half of 2020
So, what about the second half? Well, let me say this first: Dow 40,000 by yearend remains a real possibility.
Before you call me crazy, take a look at this math. The 10-year Treasury is yielding about 0.69%, while dividend paying stocks in the Dow yield nearly five times that much (3.25%). So down the road, when Treasury yields climb, dividend yields will also climb proportionally – making stocks even more attractive. So, given this 5X gap versus where the index is currently trading around 26,000, Dow 40,000 is very realistic.
So, I expect the stock market to continue meandering higher, thanks to the Fed’s ultralow interest rate policy. The 3-, 5- and 7- year Treasury yields hit record lows and the 10-year Treasury is still well below 1%. The reality is that when stocks yield four times more than the 10-year Treasury (or more), it’s incredibly bullish. Yield-hungry investors will continue to flock to dividend-paying stocks and, ultimately, provide a good foundation for the stock market.
However, there’s no getting around the fact that the second-quarter earnings season will be horrific for many investors. Analysts currently expect S&P 500 companies to see second-quarter earnings fall a whopping 43.9% and sales drop 11.2% year-over-year. The stock market will grow more narrow and the fundamentally superior stocks should emerge as the market leaders. As such, I am confident my recommendations will remain an oasis during the second- and third-quarter earnings season, as they should post strong sales and earnings growth. For example…
In Growth Investor, my Buy List stocks are characterized by 21.2% average annual sales growth and 79.8% average annual earnings growth. In Breakthrough Stocks, the stocks are characterized by 544.3% average forecasted earnings growth and 34.7% average forecasted sales growth. And, in Accelerated Profits, the Buy List stocks boast average forecasted earnings growth of 294.4% and superior forecasted sales of 54.1%.
That’s not too shabby, if I do say so myself, when you consider the expected earnings and sales decline in the S&P 500 overall!
The reality is investing in fundamentally superior companies will be critical for a successful portfolio in the coming months. There are stock “bubbles” that need to be pricked, like Nikola Corporation (NKLA) and Tesla (TSLA). As I mentioned last Saturday, NKLA is grossly overvalued, as it has no real sales to back up its $22 billion market cap.
As for Tesla, its sales have plunged in the past year in China and the U.S., so the company is being carried by European sales. However, those collapsed in the second quarter. Tesla faces increasing competition from Hyundai, Kia, Nissan, Peugeot, Renault and VW Group, which now offer low-priced electric vehicles…so, Elon Musk has his work cut out for him.
Now, TSLA stock, which trades around $1,200 per share, is in the Nasdaq 100. If its bubble is pricked, this could weigh on the index and drag tech stocks lower.
Outside of bubble stocks, the presidential election year will likely have an impact on the stock market. The presidential election year is typically quite good for the stock market. This is when candidates run around and promise everything and anything, which tends to boost consumer confidence. Successful campaigns tap into “outrage” that crosses party lines and draws big crowds.
However, we’re in unchartered territory right now, as the U.S. wrestles with the coronavirus pandemic, a recession and civil unrest. So, there hasn’t been too much “sucking up” just yet. This could certainly change down the road; time will tell.
Brace Yourself For More Volatility
The bottom line: Stocks should end the year higher, but there is plenty to keep this roller coaster moving, so investors should brace for volatility.
As such, an investor’s best defense remains a strong offense. By that, I mean stacking your portfolio with fundamentally superior stocks, like the ones I hand-pick for the Platinum Growth Club Model Portfolio. My subscribers don’t have to worry about the bubble stocks or the big banks, because we don’t own a single one. And, I only recommend stocks with strong sales and earnings growth. These are the companies that will do well, regardless of where the stock market turns next.
Speaking of, I just released seven brand-new recommendations in my Platinum Growth Club July Monthly Issue on Wednesday, as well as issued four new sells and revealed my latest list of Top Stocks. Go here for free details and get all the latest on my newest picks.
I also posted my Portfolio Grader 500 report for the third quarter. This is a quarterly guide to the best and worst stocks for the third quarter of 2020, all packaged into one easy-to-read report. In this report, you’ll receive 250 A-rated powerhouses, 250 F- or D-rated sell immediately stocks, and a full directory of the best and worst stocks by sector. Platinum Growth Club gives you full access to this quarterly guide. If you’re interested, you can find out more about it here.
Note: As a reminder, the U.S. stock markets and InvestorPlace will be closed on Friday, July 3, in observance of the Fourth of July holiday. I hope you have a safe and happy long weekend!