Macro: Strong Momentum isn’t a Reason to Sell Stocks
This rally has been an epic bear crusher. The S&P 500 rallied 28% from October 27, through the end of first quarter.
Don’t let that big performance scare you. Strong momentum isn’t a reason to sell stocks.
Thing is, the higher stocks have risen, the more bears have called for a sell-off.
A broken clock is right twice a day. The bears are finally having a moment.
Fed uncertainty and rising Middle East geopolitical tensions have put volatility back on the table.
Our macro message for investors (not traders) remains the same: stay the course. This broadening rally has plenty of gas left in the tank over the next 12 months.
Remember, bull markets are born on despair, mature on skepticism, bloom on acceptance, and finally die on euphoria. This time-tested behavioral evolution takes an average of four years to play out.
Wall Street’s obsession with calling the top smacks more of skepticism than euphoria.
Today we’ll show you why recent volatility is a buying opportunity. Then we’ll show you three new sectors with the most upside as this broadening bull market keeps on chugging.
Strong Momentum isn’t a Reason to Sell Stocks – Resist the Urge
The market’s climb has been awe-inspiring. A quick look at market history shows just how strong it’s been.
Since 1990, the S&P 500’s median six-month gain is 4.8%. That’s less than 20% of what Mr. Market delivered from late October through March 31!
We know it’s tempting to cash out after such a massive run. Keep reading to find out why that would be a big mistake.
The market’s momentum is undeniably strong. But it turns out that turbo-charged rallies are a reason to buy, not sell.
Since 1990, the S&P 500 has averaged a 13.2% gain in the 12 months following top-quartile six-month rallies, compared to a 9.6% gain in the average 12-month period.
The old adage of strength begets strength rings true:
However, we’re not saying a pullback is off the table.
Short-term drawdowns are healthy. They reset investor expectations, making bull markets more sustainable.
Near-term dips are also relatively common. Statistically, pullbacks of 5%-10% happen practically every year, though they usually only last a few months.
Given the strong odds of outsized upside looking out 12 months, the smart move isn’t to try to time short-term swings, but rather to buy dips to profit from big gains in the year ahead.
What This Means for Your Portfolio
In January, we told you Macro Drivers Signal a Broadening Rally in 2024.
Market participation is kicking into high gear as strong growth and rising interest rates fuel a rotation out of technology and into more cyclical sectors. Energy, industrials, and financials are now leading in 2024.
It’s a safe bet that cyclicals will play a bigger role in driving this bull market’s next leg higher.
Note the YTD leaderboard has reshuffled as investors favor more cyclical areas:
Let’s dig into each of these emerging sectors to see why they’re attracting the Big Money:
Energy’s biggest macro driver is oil prices. WTI crude oil is up roughly 17% this year, to about $86 or so per barrel, on the back of strong demand and increasing geopolitical risk. That’s fueling positive energy earnings revisions.
Meanwhile energy is still the cheapest sector in the market, trading at just 13.2 times 12-month forward earnings and still sports a relatively high 3% dividend yield.
Add it all up and it’s no surprise energy is 2024’s best performing sector amid surging Big Money buying.
Industrials are benefiting greatly from the economy’s resilience. As the once “inevitable” recession continues to be a no-show, Big Money is piling into this cyclical sector.
In addition, an increasing share of industrials’ revenue comes from higher margin, after-market services. The Internet of Things and AI will only accelerate this trend going forward.
Industrials’ 12-month forward earnings per share growth was recently revised up to 10%, helping fuel the sector’s expanded price-earnings ratios.
Financials stocks are seeing increasing Big Money buying thanks to light institutional positioning after a long stretch of frustrating underperformance. There’s plenty of room in most professional portfolios for higher exposure.
Banks are rallying thanks to better-than-expected economic growth. And when the Federal Reserve eventually cuts interest rates, short-term bond yields will fall, steepening the yield curve, making bank lending more profitable.
But there’s a lot more to the financials sector than banks. The space includes leading global data vendors like S&P Global (SPGI), exchanges like CME Group (CME), credit card companies like American Express (AXP), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), as well as big asset managers like BlackRock (BLK) and Blackstone (BX).
They’re all doing increasingly well amid strengthening capital markets, low default rates, and tight credit spreads.
The sector is sporting a healthy 11.4% estimated 12-month forward EPS growth rate. It’s also the third-cheapest sector in the market, with a 12-month forward P/E of 16.
All this jives well with MAPsignals’ latest sector rankings. Check out how energy, industrials, and financials recently toppled tech to lead our rankings:
Bringing It All Together
Stocks have had an amazing run. But strong momentum isn’t a reason to sell stocks – resist the urge.
Since 1990, the S&P 500 has averaged a 13.2% gain in the 12 months following top quartile six-month rallies.
Don’t be afraid to buy any dips. The economy is stronger than expected and inflation is moving in the right direction. The Fed will eventually cut rates as inflation keeps cooling.
As for the recent escalation in Middle Eastern tensions, history shows stocks tend to bounce back quickly. Since 1940, the S&P 500 has averaged a 1.8% gain 3 months after geopolitical flare-ups.
Take advantage of volatility to buy cyclical sectors like energy, industrials, and financials. Economic resilience is helping them power record S&P 500 earnings.
It’s a safe bet these new sector leaders will play a bigger role in driving this bull market’s next leg higher.
If you want to find specific energy, financials, and industrials stocks ramping with Big Money support, get started with a MAPsignals PRO subscription. It’ll get you access to our portal that updates every morning, showcasing the exact tickers getting bought and their scores.
MAP your own stocks and exchange-traded funds. PLUS, you’ll get our prized Top 20 list in your inbox every Tuesday!
There are plenty of winning stocks to pick up on weakness as the market broadens out. If you’re a Registered Investment Advisor (RIA) or a serious investor, use a MAP to find them!
Invest well,
-Alec