The stock market vs. economy gap continues to widen. It seems as if Wall Street has it wrong. Do they?
Most of the time, the stock market and U.S. economy are in gear—there are always fits and starts, but as the economy expands, earnings generally grow, and that contributes to a bull market. But it’s the times when the two are moving in opposite directions that usually throws investors for a loop, and at no time has the stock market vs. economy chasm been wider than it is now.
It’s hard not to be mentally battered and bruised if you take a look around the real world. Unemployment, though surprisingly improved in May, is still north of 13%, second-quarter GDP is likely to fall 40% or so (!) and many industries will never be the same, be it small businesses (a couple sound like they’re toast in my local town) or big (AMC, the theater chain, might not make it out alive).
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But in the face of those realities, the market has done the exact opposite of what most expected (including us)—it’s risen like a homesick angel during the past two-plus months, rallying narrowly at first but broadening out beautifully during the past couple of weeks. That broadening, in fact, has been so strong that two of the most reliable blastoff indicators we follow (the 90% indicator last week and, just yesterday, the 2-to-1 indicator) have recently turned positive!
Stock Market vs. Economy: Go with What You See
Thankfully, by staying flexible (one of the key traits of successful investing), we’ve been able to ride much of the move in our Cabot Growth Investor advisory portfolio, helping us earn an average return of 36.3% on our 10 current growth stock recommendations. And the good news is that, for the market as a whole, the evidence has grown increasingly bullish—while there are no sure things, both blastoff measures bode very well for the months ahead, our own Cabot Trend Lines are on the verge of flashing their own buy signal and other measures (dearth of new lows, more bearish individual investors than bullish) are encouraging.
To be fair, growth stocks have been mostly zigging while the broad market zags; some are still pushing higher, but many are taking a breather after heady runs in April and early May. That said, while there have been some sharp selloffs, few if any leading stocks have broken down, so the odds favor their next big moves being on the upside.
We’re not losing sight of the fact that, after such a big rally from the March lows, further indigestion, sector rotation or news-driven action could hit the scene; it’s more important than ever to focus on the best stocks and hunt for advantageous entry points. But there’s no question the big-picture backdrop is getting brighter, so you should continue to put money to work.
And if you need help determining which stocks to buy, we’re here to help! You can subscribe to my Cabot Growth Investor advisory (again, average return on current stocks, none of which we’ve held for longer than nine months, is 36.3%) by clicking here.
In the meantime, in the ongoing stock market vs. economy tug-of-war, believe what you see from the market. Until stocks start to tank again, it’s a good time to buy—even if what’s actually going on the world is telling you to sell.
Editor’s Note: This post was excerpted from the latest issue of Cabot Growth Investor.
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