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RoboStreet – April 26, 2018
Market Turbulence Reflects Transition to Organic Growth
For the past week, the stock market has come under severe selling pressure, and in my opinion, is not reflective of the widely positive transition that is occurring in the fundamentals. The S&P 500 shed over 100 points in just five trading sessions, retesting its 200-day moving average at 2,610 on Wednesday, which held and triggered some fresh buying Thursday.
Being in a headline-driven market where high-frequency trading and algorithmic program trading dominate over 70% of the daily trading volume, it doesn’t take much to upset the apple cart and see volatility spike higher and stocks gap lower. I find it interesting that a single comment from a heavy equipment maker would have such a widespread effect on everything from technology to healthcare.
It does show though that the narrative driving the volatility has turned skeptical recently in light of what is going to be a historic earnings season. The narrative was two-fold. After Caterpillar reported strong earnings and gave a bullish outlook, they suggested that Q1 was likely their high-water mark for the year. And that sent shares tumbling along with the rest of the market in what I view as an irrational sell off. The fortunes of Caterpillar have little, if anything, to do with those of JP Morgan. But that didn’t seem to matter and the market gapped lower regardless.
Then people began wringing their hands over the 10-year yield climbing to 3.0% with some suggesting this could foreshadow a recession. Several Fed officials gave speeches that took on a more hawkish tone after the latest round of economic data shows the economy and inflation are ticking higher. This is a 180-degree change in sentiment when only two weeks ago investors were citing the flattening yield curve going inverted which has preceded five prior recessions.
If we look at the 1957 recession, and the nine recessions that have occurred since then, there has never been one to begin with rates below 3.90%. In 1957, the 10-year was at 3.93% just before the recession hit. And in subsequent recessions, rates were closer to 5%, 7%, 12.5% and even as high as 15% before recessions got started. Looking at the last two U.S. recessions, the 10-year was at 4.10% in 2007, and 4.89% in 2001.
What we can extrapolate from this pattern is that the economy and equities can prosper when interest rates are below 4.0%. I would say that rates have been down so low for so long that investors have become spoiled by such accommodative borrowing conditions and any threat of short term interest rates breaching 4.0% will make for a major headwind for what is a leveraged economy, a leveraged consumer and a fickle stock market looking for reasons to sell off after a nine-year bull run.
Let’s take a rational look at the investing landscape. For one, this earnings season is shaping up to be a fantastic one. And with the corporate tax cuts only just beginning to be felt, companies should see their prosperity grow in the coming quarters, not shrink. Second quarter earnings growth are estimated to exceed the first quarter, meaning we can look forward to 20%+ growth.
As history clearly shows, recessions are defined by two quarters in a row of negative GDP. The latest report on GDP was 2.9%. And this came after domestic GDP averaged just 1.5% for the past eight years of the economic recovery. When we factor in historically low unemployment, robust job growth, almost every economic measure validating an expanding economy, and consumer confidence near record levels, the notion of a recession is not a logical forecast.
What is more likely taking place, that better explains the volatility, is that the economy is moving away from a Fed-dependent, stimulus-induced economy to one that is driven by organic growth and modest inflation that benefits wages and pricing for goods and services. Tax reform will extend the bull market- for how long is anyone’s guess- but it is safe to say the effects of lower corporate taxes will be a long-term catalyst for jobs, business investment, repatriation of capital, M&A, stock buybacks and rising dividends.
Under these conditions and with history on the side of improving economic conditions via lower tax rates and what is still a very favorable interest rate environment, 2018 should be another good year for investors holding great stocks. I’ve been building a portfolio for RoboInvestor subscribers during this period of historic market volatility which has resulted in some incredible low entry points for the stocks I’m positioning for the next four to six months.
I’ve back-tested the performance of the current RoboInvestor Portfolio going back to January 1, 2013 and benchmarked it against the S&P 500. While the S&P has a five-year annualized return of 13.68%, my AI tailored portfolio boasts an annualized growth rate that is at least twice that of the S&P 500 and without sacrificing quality to generate those returns. It makes index investing seem antiquated, and I’m just getting started.
So, taking into account the backdrop of improving economic fundamentals and expanding earnings, my AI system is forecasting the S&P to challenge 2,800-2,850 by late September as per the data created from my Tradespoon Stock Forecast Toolbox below. This would represent a 9%-10% move higher, which implies my RoboInvestor portfolio will enjoy realized gains of 20% or more. This is worth the price of an always thinking, always learning stock picking system build upon proprietary artificial intelligence that has a validated track record of making money on selected trades better than 80% of the time.
I want to encourage all readers of this issue of RoboStreet to highly consider signing up for RoboInvestor before I release the next two picks for our RoboInvestor Portfolio this Sunday night. Come Monday morning, you will have no less than eight of the finest blue-chip stocks and ETFs to buy into with the expectation of banking 20% profits over the next six months. Last week I highlighted Amazon.com as one of our holdings. Our opening price was $1,441 and today, after the sharp pull back for the Nasdaq, the stock trades at $1,500. Imagine owning seven more positions with the same potential.
Being a member of RoboInvestor is as easy as a click of your mouse. Simply click here or click on the AI announcement below and get on board today. When this market rights itself as it is starting to do as of yesterday, you’ll want to own the most high-powered short list of blue-chip stocks money can buy that have been vetted and selected by my Tradespoon AI system. We don’t get too many of these opportunities when the market shakes out weak holders of great stocks to those that have a proven system in place and a proper perspective on the bull market that is currently on sale, but not for long.
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