Today I want to talk about stock market trends, and I want to do so by starting off with a good old-fashioned rant.
Most weekends, I listen to a podcast of a fairly popular economic and market-based radio show. This past week, near the end of the show, a panel was discussing the economy and how it could perform in the quarters ahead.
One of the panelists started talking about how faster economic growth going forward was going to be difficult because productivity and labor force growth were so tame. He said this is the “new normal” because of demographics (among other reasons).
I can’t stand this type of thinking--it says “things have been this way for five, 10 or even 15 years, and thus, are unlikely to change going forward.” It’s so small-minded that I felt I had to write about it today.
The fact is that whenever the market or economic environment is good or bad for many years in a row, people tend to project more of the same into the future. And I’m not necessarily blaming them—most people don’t study market or economic history as part of their jobs.
Back in 1929, there was no fear of recession (the Roaring ‘20s were, well, roaring) or war, as “The Great War” (as it was called back then) supposedly made the world safe forever. The Great Depression followed, as did the deadliest global conflict of all time.
After World War II ended, everyone expected an economic collapse as war spending disappeared. Instead, while GDP fell some, the economy transitioned smoothly to peacetime as pent-up demand was released.
In 1955, after the Dow overtook its 1929 highs, there was a Congressional inquiry that sought to determine whether another speculative bubble was underway—the man on the street thought the market was clearly too high. But the Dow rose 68% from 1954-1959!
In the early 1980s, inflation was the norm and the stock market hadn’t made any net progress for more than 15 years; gold was a hero and bonds were zeroes. But then the next decade saw stocks and bonds soar and gold plunge.
The late 1990s was a “New Era” according to many, with rapid productivity gains (thanks to the spread of the internet) likely to remain in place for years to come. Of course, the stock market topped in 2000 and economic growth has slowed markedly since then.
Now, after 15 years of uneven economic and market performance, many people believe we’re in another “new normal,” where solid growth is no longer possible. When I hear someone cite a few statistics of the past few years and claim that it’s never going to improve, I cringe. History tells me it’s not a matter of if it’s going to improve, but when!
My above rant is mostly about what I call the fallacies of familiarity. Most investors and economists are familiar with the environment of their times, and thus expect it will continue. When things—including stock market trends—change, many are left behind.
When it comes to stock selection, most investors are comfortable investing in familiar companies, and hesitate to take a position in a company they’ve never heard of.
I mention this today because there are lots of newer, younger growth stocks (especially those that came public in 2013 and 2014) that, after going through the wringer in 2015 and earlier this year, are new market leaders benefitting from new stock market trends. Many stocks I’ve written about recently, such as GrubHub (GRUB, public since April 2014) and Nevro (NVRO, public since January 2014), fill this bill.
Another new leader is Shopify (SHOP), which came public in May of last year, and was featured in Cabot Top Ten Trader a couple of weeks back:
“While giant companies like Amazon are experts at e-commerce, 99% of firms aren’t. Therein lies the massive opportunity for Shopify. The company’s cloud-based commerce platform allows its merchants to sell via a variety of avenues (online, brick-and-mortar, social, email, etc.) and helps handle payments (more than $1 billion of payments were processed by Shopify in the second quarter), provide financing, inventory and order management and a variety of other back-end functions.
“Importantly, Shopify has established key partnerships with Amazon (it’s the chosen replacement for Amazon’s web store business), Facebook, Twitter, Pinterest and even Uber (for select, rapid delivery). Plans start out at just $30 per month for the pioneering entrepreneur and run to $300 or more per month for enterprises; those subscriptions provide about half of revenue, the other half comes from merchant solutions (payments, merchandise sold, lending, etc.). The company has seen revenues grow at least 90% in eight straight quarters, with gross merchandise volume up 106% (to $3.4 billion) in the second quarter.”
SHOP has been consolidating lately, and a solid entry point appears to be setting up. For my advice on where to buy and (eventually) when to sell, be sure to try out my Cabot Top Ten Trader. You’ll receive research like this (including suggested buy ranges, loss limits and follow-up advice) every week for the market’s strongest stocks. It’s the industry’s #1 source of new leading stock ideas!
