How to Make the Most of Today's Market

[Zacks | Our Research. Your Success.] Weekday Wisdom [Sheraz Mian - Editor] How to Make the Most of Today's Market By: Sheraz Mian April 27th, 2022 --------------------------------------------------------------- Stocks have been all over the place in recent days, but the overall direction has been to the downside. Stocks sold off in a major way in recent days, after a dramatic but short rebound that ended in late-March. Driving this rapid shift in sentiment is the fear of tighter Fed policy in response to inflationary pressures. The indiscriminate sell-off appears to reflect the market's anxieties about the speed and magnitude of Fed interest rate hikes and the impact they will have on the economy. The Fed Chairman has effectively confirmed one or two 50 basis-point rate hikes at the next two FOMC sessions. Market bears see this emerging consensus in the panel for hawkish policy as indicative of tougher times ahead for the market and the economy. Valuation worries also figure prominently in the bearish view of the market. There are others in the market with more optimism about the outlook who see the recent sell off as providing an opportunity to buy quality stocks at discounts. This narrative is sanguine about the Fed, sees ongoing inflationary pressures as Covid centric for the most part and sees nothing egregious with valuations given the still-favorable outlook for interest rates and earnings. The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let's examine the landscape of bullish and bearish arguments to help you make up your own mind. Let's talk about the Bull case first. Inflation & the Fed: The outlook for inflation and what that means for Fed policy is the biggest point of difference between market bulls and bears at this point in time. The bulls see the ongoing inflationary run as a direct result of Covid-related factors that will ease once the pathogen becomes endemic. It is hard to argue with the bulls' view that the pent-up demand in a number of product and service categories will eventually normalize, which will have beneficial effect on prices. Related to the above argument are expected favorable developments on the supply side of the equation as the pace of infections ease. Partly delaying this expected normalization are Covid-related developments in China and disruptions caused by the war on Ukraine. The bulls see the recent shift towards a hawkish posture as affording the Fed greater flexibility. In effect, the Fed purchased an insurance policy with this change that allows it greater room to maneuver as the inflation picture evolves. The Fed's hard-won credibility on the inflation question is one of the biggest tools in its arsenal as it leads the market in the current environment of evolving inflation expectations. Continued . . . [Notification of Release: 5 Stocks Set to Double]( Five Zacks' experts have each revealed their single favorite stock with the best chance to gain +100% and more in the months ahead. Previous editions of this Special Report have racked up gains of +143.0%, +175.9%, +498.3%, and even +673.0%.¹ Today, you are invited to download the just-released report that names new stocks and spotlights why their gain potential is so exceptional. [See Stocks Now »]( The Economy's Strong Foundation: The U.S. economy's growth pace decelerated sharply in Q1, as Thursday's report is expected to show. But beyond the GDP report's underwhelming headline growth number will be plenty of the same sources of strength that gave us the red hot +6.9% growth rate in the preceding period. Growth is expected to resume from Q2 onwards, as the Omicron effects recede and supply-chain issues ease, with the Zacks economic team projecting 2022 GDP growth at an above-trend +3%. Driving this favorable growth outlook is the U.S. household sector that remains in excellent financial health. The unprecedented fiscal support was instrumental in helping keep household finances in good shape through the pandemic, with labor market gains expected to sustain the momentum going forward. In addition to the elevated consumer spending outlook, adding depth to the economic rebound is a strong housing sector and continued factory sector momentum. These strong pillars of the U.S. economic foundation run contrary to what are typically signs of trouble ahead on the horizon. Valuation & Earnings: Tied to the economic and interest rate outlook is the question of stock market valuations that have become even more alluring after the recent pullback. Granted there are pockets of the market that need to get rerated as the Fed shifts course. These at-risk or exposed pockets consist of relatively smaller companies that require many more years of investments to reach their full profitability levels way out in the future. Many of these stocks had lost ground even before the recent market weakness and the Fed uncertainty could very well weigh on the space a lot longer. But there are many other stocks in the market that are best positioned to drive sales and earnings in the current positive economic growth environment. We have seen many of these leaders from a variety of sectors and industries, including Technology, come out with blockbuster quarterly results in recent days. Earnings growth was very strong in 2021 and the momentum is expected to continue in 2022 and 2023, albeit at a decelerated pace. This line of thinking sees current valuations and earnings outlook as a tailwind for the stock market. Let's see what the Bears have to say in response. Endemic Inflation & Fed Tightening: The sub-par 'headline' growth rate will not be the only notable piece of detail in Thursday's Q1 GDP report, as it is also expected to show a red hot 'core' PCE reading that will top the preceding quarter's multi-decade high level. The Fed risked damaging its hard-won inflation-fighting credentials had it stuck to its 'price-pressures-are-transitory' narrative in the face of persistent inflationary readings month after month. Many in the market believe that the central bank took too long to accept this reality, which will necessitate even tighter and stringent measures than would have otherwise been the case, the recent market 'chatter' about one or more 75 basis point rate hike. This line of thinking sees the economy's ongoing inflation bout as resulting from the Fed's super easy monetary policy and excessive fiscal stimulation over the last two years. Given this situation, the Fed is on course to do its first 50 basis-point hike and start the process of shrinking its $9 trillion balance sheet at its meeting next month. While there is also some chatter about 75 basis-point hike(s), two back-to-back 50 basis-point hikes in May & June are fully priced in at this stage. The expectation is that the Fed takes interest rates to the 'neutral' level around Fall and then take a pause to see what effect this tightening cycle will have on the economy. The Valuation Reality Check: A big driver of the stock market's bull run has been thanks to the Fed's ability to flood the market with liquidity. The central bank achieved that by keeping interest rates at zero and buying a boat-load of U.S. treasury and mortgage-backed bonds that expanded its balance sheet to almost $9 trillion at present, more than the double its size at the start of 2020. Fed tightening and the associated higher interest rates has a direct impact on the prices of all asset classes, stocks included. Everything else constant, investors will be required to use a higher discount rate, a function of interest rates, to value the future cash flows from the companies they want to invest in. This means lower values for stocks in a rising interest rate environment. The Growth Question: Current projections of GDP growth for this year and next assume that the Fed is successful in executing a 'soft landing' for the U.S. economy as it moves towards tightening monetary policy. There is no basis for us to doubt this confidence in the central bank's abilities, but we shouldn't lose sight of history that tells us that economic growth typically falls victim to the Fed's inflation-fighting efforts. A handy metric to keep an eye on for growth outlook is the spread between the 2-year and 10-year treasury bond yields. A flattening trend, as has been the case lately, will suggest the need for reigning in growth expectations. Where Do I Stand? I am very skeptical of the bearish narrative's Fed tightening outlook and see this scenario as nothing more than a worst-case or low-probability event. My base case sees the Fed moving from the current 'stimulative' policy stance to one that is essentially 'neutral'. In a 'neutral' policy setting, the Fed is neither 'stimulating' nor 'restricting' economic activities. They reach the 'neutral' policy stage by 'expeditiously' raising rates, as the Fed likes to state, at its coming policy meetings and reach the 2.25% to 2.5% level later this year. I see the Fed pausing at that stage to see what data shows about inflation trends, which will most likely have started easing already as the pandemic related effects start to ease. This wait-and-see approach from the Fed in the second half of the year appears to be the most plausible scenario given the risks to growth as a result of premature tightening, a threat to the Fed's second 'full employment' mandate. The bottom line on the Fed front is that it is shifting policy towards normalization as the U.S. economy no longer needs the extraordinary stimulative measures that were put in place in the wake of Covid-19. As policy moves towards 'neutral', we see stable financial conditions and interest rates that keep the economy's growth trajectory in place. Regular readers of my earnings commentary know that the earnings picture has not been this good in a long time. The growth pace is undoubtedly expected to decelerate going forward, but the overall earnings picture will remain very strong. We expect the overall trend in earnings estimate revisions to be stable to positive in the coming weeks and accelerate as we put the pandemic behind us. Markets are forward-looking pricing mechanisms and the recent weakness is highlighting this interest rate and growth uncertainty on the horizon. We don't envision this uncertainty dissipating next week, but we do see investors eventually coming around to our view of inflation, the Fed and great times ahead after a short period of volatility. We take advantage of this period of turmoil by slowly building positions in great stocks that are currently available at significant discounts to their true values. How to Make Today's Market Work for You Today is the perfect time to take advantage of the current strength of our economic recovery. That's why I'm inviting you to download our just-released Special Report [5 Stocks Set to Double](. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead. Previous editions of this report have racked up some huge gains. Examples include Boston Beer Co. +143.0%, NVIDIA +175.9%, Weight Watchers +498.3% and Tesla +673.0%.¹ The earlier you get into these new stocks the higher their profit potential: Stock #1: A Top Dog with Consistent Growth Traveling in the same circles as technology heavyweights, this company's fiscal 2021 revenue climbed to a record $15.8 billion. Estimates call for revenue to jump another 13% in 2022 to reach $17.8 billion, and 15% higher in 2023 to come in above $20 billion for the first time ever. Stock #2: Technology that Could Drive the Next Decade's Innovation At the forefront of the electric vehicle (EV) revolution, this company is primed to print money over the next couple of decades. In fact, they already have over $1.5 billion in contracted revenue through 2027 through partnerships with industry leaders. Stock #3: Recovery is in Full Swing A leading fashion specialty retailer in the U.S., this company boasts impressive digital sales growth, an ever-expanding brand portfolio and a business that's successfully rebounding from the pandemic, all of which makes it stand out from its retail peers. Stock #4: A Small Player Says "No Thanks" to a Monopolist This $2 billion developer of genetic sequencing technology has strong sales growth estimates this year with a consensus forecasting $284 million on the topline, for 73% growth next year! Investors have an excellent opportunity to capitalize. Stock #5: A Current Market Leader Set to Release Blockbuster Lineup An established veteran in its industry, this company has been outperforming the general market for the past several months. It's receiving positive earnings estimate revisions, and total sales in the coming year are an expected $15.27 billion. To put the odds of success even more in your favor, you'll also gain access to our unique arrangement called [Zacks Investor Collection](. It gives you the picks and commentary from all our long-term portfolios in real time for the next 30 days. Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. Last year alone, they closed 68 double and triple-digit wins. There have already been 14 more in 2022. Gains have reached as high as +150.9%, +348.7% and even +995.2%.¹ Keep in mind, the opportunity to download our 5 Stocks Set to Double Special Report ends on Sunday, May 1. [Look into 5 Stocks Set to Double and Zacks Investor Collection now »]( Thanks and good trading, [Sheraz Mian - signature] Sheraz Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access [Zacks Investor Collection](. ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by [Zacks.com](). We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through February 28, 2022. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit for information about the performance numbers displayed above. Zacks Emails If you would prefer to not receive future profit-producing emails from [Zacks.com]() the primary purpose of which is the commercial advertisement or promotion of a commercial product or service, then please [click here]( and confirm your request. If you have trouble with the unsubscribe link, please email support@zacks.com. Zacks Investment Research 10 S. Riverside Plaza, Suite 1600 Chicago, IL 60606