I’m a student of market history, and I know that the market tends to grow narrow as it climbs higher. I’ve also been waiting for stocks to consolidate their recent gains. Well, when Asian stocks decided to explode higher, U.S. stocks exploded higher Monday, too! So, it’s a good moment to get a lay of the land and see where our best opportunities lie.
Not only are vehicle sales starting to perk back up in China, but some other major improvements are happening overseas. Based on the purchasing managers’ indices (PMIs), global manufacturing increased substantially in May in Australia, the U.K., France, Germany, Ireland, Malaysia and Vietnam. China also reported that its manufacturing index rose to 51.2 in June, up from 50.7 in May. That’s the highest level in six months.
Retail and services are also giving very positive signs that the global economic recovery is underway. In Europe, May retail sales were shockingly strong for the European Union (EU) and major countries like Germany. Monday’s ISM service report just exploded to the upside in June. Meanwhile, Fed policy is stimulating the parts of the economy that are interest rate sensitive, like autos and housing, where sales are also very strong right now.
The bottom line is, you can’t keep the world locked up forever. People are getting out and about, albeit with masks. Commerce is continuing, and we can’t go back; it was dangerous to our healthcare systems, in particular, to shut down other healthcare facilities because of COVID-19.
Not only that, but U.S. consumers especially are downright optimistic right now. The Conference Board’s Consumer Confidence Index climbed to 98.1 in June, compared to 85.9 in May. Even more telling, the present situation index—which considers Americans’ thoughts on business and employment conditions—soared to 86.2, up from 68.4. And consumer spending is absolutely crucial to an economic recovery: it now accounts for about 80% of GDP growth!
That’s why I always like to own consumer stocks like Chipotle Mexican Grill (CMG) for my newsletters like Growth Investor. During the first quarter, the company saw a big surge in online orders. In fact, digital sales soared 80.8% year-over-year. To capitalize on that, Chipotle is now teaming up with Grubhub (GRUB) to take orders from that app, plus Shopify (SHOP) to create a Chipotle Virtual Farmer’s Market. When that launches, you’ll be able to buy meat, dairy and grain from Chipotle suppliers online.
Now, when we look at consumer stocks, we also want to keep the employment trends in mind. And the latest reports had some interesting news. For instance:
1. Out of 4.8 million jobs created in June, 2.1 million were in leisure and hospitality.
That sector has been closely watched, and some jobs could be lost again if COVID-19 restrictions continue. But hopefully we’ll be out and about in this “new normal.”
2. For the private sector specifically, 2.4 million jobs were created in June, according to ADP.
3. But the really big news is that May’s ADP report was revised up to a 3.1 million gain. The previous figure gave us all some grief, with a 2.8 million reported loss. So, this suggests that the Labor Department’s rosier report for May payrolls was much more accurate.
Speaking of the Labor Department, that June payroll jobs increase of 4.8 million crushed economist forecasts for 2.9 million jobs. The unemployment rate also declined to 11.1% in June, down from 13.3% in May.
However, in spite of these positive reports, economists at The Organisation for Economic Co-operation and Development (OECD) and the Federal Reserve still aren’t anticipating a V-shaped economic recovery. In fact, Fed Chair Jerome Powell’s testimony before Congress last week promoted more economic uncertainty. So, it wasn’t too surprising that the latest Federal Open Market Committee (FOMC) minutes confirmed that the Fed will remain “highly accommodative.” Coincidently, Treasury yields fell last week, so the Fed is also continuing to push down interest rates to stimulate economic growth.
The good news is that these ultralow interest rates will also continue to stimulate the stock market. Analysts at Bespoke looked at the 100 days following the March 23 lows, and the S&P 500 was already up 39% by July 1. That was its strongest 100-day run in more than 80 years.
Looking at the other five occurrences when the S&P 500 rallied more than 33% in 100 days, every single time, the S&P 500 posted substantial gains in the following one month, three months and six months. On average, the S&P 500 rallied an impressive 13.5% in the year following the 100-day surge.
That being said, the S&P 500 declined an average 2.6% in the week following all five of the previous 100-day surges. So, with history in mind, don’t be surprised that the S&P 500 pulled back this morning. It may continue to do so this week.
Then next week, we’ll start getting second-quarter earnings announcements. I’m not worried about sales or earnings for my stocks, but overall, second-quarter results will be mixed, as many companies are reeling from the coronavirus pandemic. I think Wall Street is going to be looking ahead and wants positive guidance. So, it’s possible that a stock can still go higher if it shows good third-quarter earnings momentum.
Basically, the formula for stocks right now is low interest rates and a strong global recovery. I’m incredibly impressed with how strong my ADRs (American Depositary Receipts) are from Israel, Taiwan and China. The latter is definitely leading the way this week, and you just can’t keep the entrepreneurial spirit down around the world. The stock market is celebrating a V-shaped economic recovery (though a lot of us still think it’s ultimately going to be U-shaped!)
The summer months are when people are out and about, traveling, and hopefully that will lift the stock market. Again, we still might have some consolidation, but before earnings start rolling in again, we’ll use that time to make sure we’re positioned in the crème de la crème.
By that, I mean stocks with superior fundamentals that Wall Street tends to prefer, long-term – like the ones I recommend for Growth Investor. That bunch is characterized by 21.2% average annual sales growth and 79.8% average annual earnings growth—and analysts have upped earnings forecasts by 15.2% on average in the past three months. So, I’m anticipating wave-after-wave of positive earnings to drop kick and drive our stocks higher in the upcoming weeks.
As such, I’ve recommended four new buys for Growth Investor in the last 10 days. Most of them are much lesser known than Chipotle – but all of them are forecast to multiply their earnings, year-over-year. And analysts are revising their expectations even higher!