I’m not a fan of market labels, especially when it comes to the overall market. I vividly remember the summer of 1998, when the bull market was just starting to fall apart due to worries over Russia’s currency and, eventually, the bankruptcy of Long Term Capital Management.
I was an intern for a broker at Prudential in Boston, which basically meant I got him Dunkin’ Donuts when he wanted it and cold-called some people from time to time. (Side note: This guy ordered his iced coffee with five creams and five sugars. The coffee came out looking like a milk jug and tasted like a toothache. But I digress.)
I can’t complain, though—I was able to talk to some high-performing brokers and listen in on company-wide strategy calls. On one call, as the market began to unravel, Ralph Acampora, who was the firm’s head of technical analysis, told everyone the market had turned bearish. (It was a good call—the Nasdaq ended up falling a whopping 33% in just four months!)
Anyway, one broker asked Ralph whether the market’s decline was the start of a new bear market, just a correction or the first of three waves down. Acampora’s response was “I don’t know—call it a banana for all I care. The market is headed down.”
I’ve always remembered that, and in the 18 years since, I’ve tried to avoid using too many labels on the market. It’s usually better to just say “uptrend” or “downtrend” and leave it at that.
But, today, I want to take a step out on a limb and say that I think stocks have begun a new bull market. That’s right: Despite all the talk you hear about the aging bull move, I think stocks might have started a sustained run higher—a run that I believe can last many months, if not a couple of years!
Below is a list of reasons (divided into technical, fundamental and sentiment categories) why you should be thinking big during this uptrend.
Technicals for a Bull Market
- The first reason pointing to a new bull market is the charts. As you see below, the S&P 500 made no net progress from December 2014 through October 2016, nearly two years of no progress. And now, of course, the index is at new all-time highs and freewheeling. To me, this looks like a huge base breakout—and after two years of slopping around, it’s likely that the advance will last more than just two or three months.
- I also think the past two years represented a “rolling” bear market that re-set the market’s landscape. A two-year period of no progress with a 15% correction in the middle is pretty bearish. And that’s just the S&P 500! The Nasdaq fell a maximum of 19.5% and small cap indexes fell 21.6% within the past two years. Remember, few bear markets are like 2000-2003 or 2007-2009; most are far more modest.
- Sustained rallies usually start with tremendous power, and we’ve had plenty of that from the broad market. On December 8, for instance, the number of stocks hitting new 52-week highs on the Nasdaq reached its highest level in at least 20 years, while the number of highs in the S&P 600 Small Cap Index reached its biggest figure since at least 2002! Historically, that does lead to a short-term digestion phase … which is exactly what we’ve seen in recent weeks. But coming off a two-year period of no progress, that buying power likely portends higher prices to come.
- There’s a lot of talk about higher interest rates and how that’s bad for the market. But history shows that’s not the case. According to LPL Research, there have been 11 periods of rising interest rates (at least a 1% rise in the 10-year Treasury note) since 1996, each lasting an average of six months. During those times, the S&P 500 rose an average of 5.4% (so, annualized north of 10%). The point is that rising rates from low levels often coincide with rising stocks.
Fundamentals for a Bull Market
- There’s growing evidence that the economy is set to accelerate. Most leading economic indicators have been accelerating for months (even before the election). The Economic Cycle Research Institute’s Weekly Leading Index is now growing at its fastest rate since 2010. More than likely, we’re going to start to see 3%-plus growth in the future.
- A big reason for that acceleration in growth is the oil sector. Now that oil prices have bottomed and stabilized (and are now back above $50 per barrel), the energy sector will open its wallets and provide a tailwind; capital spending is heading up.
- I think one super-underappreciated story is that the new bosses in Washington, D.C. want to cut the corporate tax rate (from 35% to 15%–20%) and allow immediate expensing of all equipment purchases (i.e., no depreciation). Obviously, no one knows the exact legislation that will pass, but think of how much larger many firms’ earnings will be if they get such a huge tax cut! I think the market is sniffing this out and bidding up stocks on that premise.
Sentiment for a Bull Market
- I’ve written about poor investor sentiment many times in recent months, so I won’t rehash everything—suffice it to say that the man on the street has become totally disillusioned with stocks due to the lack of progress, slow economic growth and myriad uncertainties in recent years.
- The most glaring statistic I came across was that, from the start of 2015 up until the election, more than $200 billion was pulled out of U.S. equity funds and ETFs, while a bit more than that was shoveled into bond funds and ETFs. That’s a two-year stretch of risk aversion, which is now coming to an end.
- That last part is key—it’s the shift from risk aversion to risk taking that bolsters stocks. Since the election, nearly $46 billion has flowed into U.S. equity funds, while nearly $3 billion has left bond funds.
A Growth Stock That’s Setting Up
The trick with the market thus far is that most of the action has clearly been in cyclical stocks. That’s fine by me, and I’ve actually added three names in those groups to Cabot Growth Investor since the election.
That said, we’re now seeing signs that growth stocks are taking on a leadership role—while most major indexes remain in tight sideways ranges, the growth-heavy Nasdaq has actually been nosing to new all-time highs of late. Plus, I’m seeing more and more growth stocks setup (and a few lift to new highs) as I go through my screens every few days. Once the market resumes its uptrend, I think earnings season could launch many growth stock winners.
One to watch is HealthEquity (HQY), which is one of the few growth stocks that’s already broken out on powerful volume. I wrote about it in Cabot Top Ten Trader a couple of weeks ago:
“HealthEquity is one of the largest non-bank custodians of health savings accounts (HSAs), and the stock has surged to new highs as investors are thinking use of HSAs will accelerate following any health care reform that’s signed into law. Not that HealthEquity is completely dependent on what happens in Washington, D.C.—the company’s sales and earnings have been growing rapidly for the past few years (see table below), and there’s more of that on the way. At a conference last week, management announced that its number of network partners (big health plans and employers that use HealthEquity’s platform for its customers and employees) grew by more than 30%, and the top brass also said it thinks the market could double by the end of 2018 and, eventually grow six-fold or more. The company makes money a few different ways (mostly fees paid by its network partners and customers who invest and withdraw money from their HSAs), but it’s all tied to the number of total members (2.4 million at the end of October, up 48% from a year ago) and the assets held in its HSAs ($4.3 billion, up 59%), both of which are expanding steadily and rapidly. Analysts see earnings ratcheting up 35% next year, but that could easily prove conservative depending on any loosening regulations (allowing more high-deductible health insurance plans that use HSAs) that come out of Washington. The valuation is big, but so is the story.”
So the story and growth numbers are compelling, and as I wrote above, the chart looks great, too—HQY just surged out of a tight area on huge volume, notching new highs. And, impressively, it’s held its ground in recent days despite the choppy market.
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