Some things are very unpredictable these days. Believe it or not, the market is not one of them.
Neither are investors’ reactions. When things get bumpy, they panic and sell stocks. Then they wait for the opportunity to buy again.
The problem is, most never do. Stocks bounce, and investors wait some more just to make sure. When stocks keep bouncing, investors are forced to either buy higher or keep waiting.
If you’re not sure what to do, I have a message for you: Buy.
Several of the stocks I recommend in Investment Opportunities and Early Stage Investor have pulled back under their buy limits amid the broader weakness, and I’m telling my readers to grab them at these prices if they don’t yet own them.
There are lot of reasons why now is a buying opportunity, so let’s focus on three of the big ones.
Rally Factor #1: The Election
It may sound counter intuitive, but the market likes a divided government. The S&P 500 is up more than 30% since President Trump was elected two years ago. The Democrats taking back the House injects a new catalyst that historically drives the market higher.
My friend Ryan Detrick at LPL Financial posted a great chart showing how powerful this trend is. Under a Republican president (the yellow bars), a split Congress is the best scenario for the market. Going back nearly 70 years, this scenario produced an average annual return of 15.7%.
Rally Factor #2: Seasonality and History
Call this one a twofer.
First, we are coming out of a stock market correction that was due – overdue actually – and healthy. The average decline in a correction is 13%. The S&P 500 came very close to that with an 11.4% drop.
Second, we are heading into the strongest three months of the year. Here is what the S&P 500 has averaged in these months over the last 90 years:
- November: +0.7%
- December: +1.4%
- January: +1.1%
Thanks to number one, we enter number two with stocks at attractive valuations. That’s a buying opportunity.
Looking ahead, I believe earnings could increase by 10% next year. If that turns out to be the case, we could see some spectacular gains.
Assuming 10% growth, S&P 500 earnings for 2019 would be $178.73. At some point next year, the index should trade at 20 times earnings. That would put the index at 3,575. That’s another gain of almost 30%!
Rally Factor #3: Earnings
Current earnings have also been very strong, though a lot of folks missed this, ignored this, or forgot about it in the volatility. That coils the spring for a bounce.
With nearly 75% of S&P 500 companies reporting, 78% beat expectations. That is better than the five-year average of 71%. In addition, 61% beat on revenue.
Earnings are up 25% over last year. If that continues, we would see the second-highest bottom-line growth since the third quarter of 2010. It is also ahead of estimates for 19.3% growth coming into the reporting season. The strength is broad based, too, with all 11 S&P sectors on pace to beat expectations.
This was lost in the October swoon. Investors “sold the news” without considering the big picture. Earnings beats have gone largely unrewarded while misses have gotten hammered.
- Companies that beat: Average gain of just 0.2% from two days before earnings to two days after. That’s well below the five-year average of +1%.
- Companies that missed: Average loss in that same time of 3.8%, which is much harsher than the five-year average of -2.5%.
This brings us back to valuation. The S&P 500 is now trading at less than 15.6 times future earnings, which is cheaper than the average over the last five years.
— FactSet (@FactSet) November 5, 2018
Rally Factor #4: Don’t Miss It!
This extra factor is not a catalyst for the market but for you.
Don’t miss the opportunity.
How many times have you looked back and wished you had bought a beaten-down stock? There are not enough fingers on my hand to count the number of times I have had that feeling.
I know that hindsight is 20/20, but you don’t want to look back a couple of years from now and regret not buying good stocks at good prices.
We’ve already seen big bounces, but it’s not too late.
Since the S&P’s closing low on October 29, two stocks in my Investment Opportunities service have soared more than 50%. Both are profiting from the trend toward marijuana legalization, which took a few more steps forward in yesterday’s elections.
Another stock jumped 30% in a little over a week. This one is a promising young biotech – and it’s still great buy, too.
Three more have gained over 20%. Two are again marijuana companies, including Canopy Growth (CGC), the largest weed company in the world and a core holding in my book. The other is the best-positioned company to profit from Canada’s full legalization. It just got listed on the New York Stock Exchange, which is another catalyst. That’s why you want to be in these stocks early.
There are still great opportunities in big, investable themes set to generate huge long-term gains. Please don’t miss out.
Note: I mentioned the huge gains in marijuana stocks. Mark your calendar now for Tuesday, December 4. I don’t know what you have planned for this day … But whatever you’re doing, I suggest you rearrange your schedule, because you’ve got the chance to make a heck of a lot of money, beginning on this exact day.
All thanks to the red-hot cannabis industry …
Even if you don’t know a thing about the marijuana markets …
Even if you’ve never bought a stock before …
Even if you have just a small amount of cash, you could multiply your money many times over beginning just a few weeks from today. What’s going on exactly and how can you cash in?