Over the last year or so, I often wondered about the certainty of our current stock market predicament.  In a way, I guess you could say that I saw this coming from a mile away.

As someone with a strong record of seeing the future, the predictability of last week’s events should not come as a surprise. Unfortunately, knowing what transpires in advance does not necessarily lessen the pain, but with respect to investing, a wee bit of foresight can be the difference between beating the market versus lagging the market.

How do I do it? 

Honestly, most of what I do relates specifically to the understanding of human behavior combined with a deep appreciation for the nuances of the business cycle. Just as we know that when we drop an object it will fall to the ground, we also know that economies grow and that economies recede. The laws of economics are immutable.

Knowing this provides the illusion of being able to see the future, but in reality, anyone with an understanding of these laws can do the same thing I do.  There’s no mystery.

The Equity Conumdrum

Recently, I have been wrestling with what has become somewhat of a conundrum regarding equity prices. Specifically, the relationship between oil prices, economic growth, and stock prices are now so tightly wound tight, the only unavoidable result is lower stock values. As investors, we are in a box that we cannot avoid (see, “You Still Need Stocks, Just Not the Headaches.“)

On one hand, economic growth is needed to spur higher equity prices.  Unfortunately, strong economic growth allows speculators to drive up commodity prices and that in turn fuels inflation. Inflationary pressure results in rising interest rates and lower corporate margins.  Lower corporate margins decreases the future value of earnings, and therefore pushes traders to sell stocks.

On the other hand, slower economic growth has done little to reduce speculation in commodities.  Lower interest rate requirements embolden traders to bid up prices in oil markets in the anticipation of a recovery. Higher oil prices and slower growth reduce corporate profits.  A reduction in corporate profits requires lower valuation in domestic equity markets. As I said, we are in a box with the unavoidable consequence being lower stock prices.

Fortunately, conundrums like this cannot last forever.  They are inefficiencies in the market that are now being exploited by astute traders, mostly in the commodities markets (see, “The Doctor is In: Your Midyear Portfolio Checkup.”) So what is required to break the trend?  Frankly, we need a drastic change in behavior that will prove to traders that we, as consumers and producers, can be more productive with less. At the moment the market is not convinced that we can do this. 

I disagree.

We will adapt to the current state by changing behavior in such a way that demand for oil will be substantially less than anticipated.  When that happens … watch out! The ensuing crash in oil markets will trigger a rally in stocks that I expect to be quite powerful.

Today, we are in the early stages of the kind of behavior change that will move markets.  We must continue to be patient, but eventually this conundrum will come to an end. When it does, there are a plethora of stocks to be bought that can be anticipated to rally in the aftermath. Take Louis Navellier’s Top 5 Stocks for July for instance. Navellier just added two new agriculture plays to his Blue Chip Growth portfolio in order to take full advantage of today’s commodities cycle and tomorrow’s stock market rebound. To see which agriculture stocks made it into his Top 5 Stocks for July, download the July issue of Blue Chip Growth.

At Blue Chip Growth, we stake our reputation on every investment we make and will return your money if we fail to meet your expectations. Our goal is to hand our readers 35% to 50% gains every 12 months. We never fall in love with stocks, nor do we stick with losers. This is how we’ve beaten the S&P 500 $3-to-$1 over the past 10 years. To get the names of my Top 5 Stocks for July, sign up for your risk-free trial subscription to Blue Chip Growth today!