Our Stock Market Outlook
This is an excerpt from Cabot Growth Investor.
Our main focus is always on the day-to-day and week-to-week action of the market and our stocks, especially now, as earnings season revs up. But we continue to see more and more evidence that suggest the stock market is at or near the start of a multi-year run higher. Such a run is often called a secular bull market or a bullish “super cycle,” but whatever you call it, the odds favor the next 10 or 12 years being very fruitful and our stock market outlook is positive.
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As we’ve written before, part of this conclusion is simply based on the monthly chart—the S&P 500 spent 13 years capped by the 1,575 level (2000-2012) before breaking out on the upside, and it’s now spent three years living above those old highs. (Most major indexes, except for the Nasdaq, are also in all-time high territory.) This sort of pattern—no progress for 10 to 20 years, followed by a new run—has been seen repeatedly through stock market history as investor perception waxes and wanes. So it seems we’ve only recently come out of this long sideways phase.
But the evidence goes far beyond the chart, as we’re seeing many signs that investor perception has a long way to go before reaching truly enthusiastic levels. For instance, Gallup recently found that just 52% of Americans own stocks either directly or through retirement plans. That’s the lowest number since Gallup starting asking the question in 1998!
Another long-term contrary indicator is the “right track-wrong track” numbers that pollsters ask potential voters. In a recent NBC/Wall Street Journal poll, just 24% thought the U.S. was on the right track versus 70% on the wrong track. That’s up from the lows of a few years ago (12%-78% in 2008), but not even close to the good vibes of 2000 (55%-31%). This has nothing to do with politics, as these polls have had lopsided wrong track numbers for many years under different administrations and Congresses; the point is that if most people believe the country is going south, fewer will put money into “risky” stocks … resulting in more buying power as people gain confidence.
Lastly, we can’t help but think of interest rates. Today, we’re seeing many large economies offering government bonds with negative coupons—that is, savers invest in these bonds and get less back when they mature. Imagine! We continue to believe such an extreme situation reflects a lack of confidence in putting money to work in “riskier” assets; many people would rather lose a little than take a chance in the stock market.
All of this is very big-picture stuff—it won’t affect our actions in the near-term as we plow through earnings season. But we want to make the point that, despite the worrisome news out there, the stock market is likely to do well in the years ahead now that the no-progress period of 2000-2012 is behind us.
Big Stock Market Drops Take Time to Heal
One big mistake we see over and over again is when investors eagerly jump back into a former, broken winner that appears to be coming back from the dead. Some of these stocks do reclaim their former glory, but like many things in the market, timing is everything.
The key is to remember that big drops almost always take many months to heal … and that’s assuming they come back at all. Generally speaking, any prior winner that falls more than 40% from its highs over a few months won’t be able to make an immediate comeback—there will be lots of owners who will sell on the bounce, leading to a base building process that takes time. And if fundamentals go south, the stock will often plunge to even lower lows.
We’re seeing that in some former winners right now. Take a look at Palo Alto Networks (PANW)—after tripling in about a year, shares topped out for a few months and fell from 43% from late November to early February. But after a strong off-the-bottom bounce, sellers recently whacked the stock near its 40-week moving average.
PANW still has great sales and earnings growth, and we remain believers in the need for cybersecurity protection in the years ahead. But shares likely need more time to wear out discouraged shareholders (and attract some new true believers), even if the firm’s growth continues. It’s usually best to avoid the siren song of prior big winners, at least until they spend many months setting up properly.
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