Wall Street is finally starting to remember that it loves roller coasters more than it dreads uncertainty. After all, doubt always will be with us, but thrills are what make life in the market both fun and lucrative.
And thrills are a product of stocks climbing big walls of worry, picking up power day after day until the final breathtaking view opens. I’m starting to get the feeling we’re close to that point.
After all, there’s been plenty of worry to overcome. August looked a lot like May and the summer between them played out a lot like the trailing year as a whole: trade war, recession risk, stagnant earnings and a flat yield curve.
Any of these fear factors on their own could have ended the longest bull market in memory. Together, they drove the 18 percent slide that started almost exactly a year ago and then the double-dip correction that stocks wrestled with this summer.
But between those dips, the S&P 500 also punched through all the historical barriers with a monster 26 percent rally. The market mood swung from apocalyptic to ecstatic. Now the question is where the roller coaster will go next.
I only had a little time on Bloomberg last week to provide my answer. (Click here to watch the video.) Here’s what I think will drive the market for the remainder of 2019 and into next year.
The Fed Starts the Game
Nothing permanent is going to happen in the trade war before negotiations start again in October. If tariffs rise or fall in the meantime, I’ll be surprised but not shocked.
That means the Federal Reserve will get the next play on Sept. 18. Almost everyone is predicting a second 0.25 percent rate cut then.
Since that’s not even two weeks away, it’s worth noting how the last rate cut tilted the market roller coaster behind all the trade war headlines and the rumbling about the risk of a recession.
(I don’t see a recession in the immediate future, by the way. Everything we’re seeing in the broad economic environment is simply too good to flip straight into a contraction without huge shocks along the way.)
As we discussed last week, every rate cut right now translates into a 3.5 percent higher trading range for the S&P 500. We’ve seen that play out in a pattern of higher market bottoms compared to May. Soon, we might see a higher top as well.
Two weeks from now, the Fed’s support will make it harder for the S&P 500 to dip below 2,925 even on the worst beats in the news cycle. And with another rate cut anticipated for October or December, that market floor keeps climbing.
In a market dominated by confidence but not urgency, that’s all it takes to entice passive money back in from the sidelines while we’re waiting for earnings growth to pick up again.
Increasing corporate cash flow and declining forward multiples are usually the incentive to buy before it’s too late. For now, the Fed is providing that nudge instead.
Admittedly, the next few months will still be volatile compared to the cozy comfort zone of recent years. The roller coaster is nowhere near any kind of final destination.
But if you’re a tactical investor with the ability to pick the fastest stocks in order to buy the dips and sell the peaks, the ride is generally worth the tension along the way. And even if you’re stuck in a buy-and-hold mindset, the track keeps grinding higher through the twists.
Factor out the extremes and the S&P 500 has gained 2 percent in the last year. While that’s not great, it shows that the bulls still have the upper hand. The bear scenarios, meanwhile, are as extreme as they get.
Granted, 2 percent a year isn’t exciting. Tactical investors can do a lot better. But it’s better than what Treasury bonds are paying now, and that in itself will keep at least a trickle of money flowing into stocks, month by month and year by year.
All you need, of course, are the right stocks.
Growth and Yield Are as Hot as Ever
Two broad themes are running the market right now. They’re usually considered mutually exclusive, but if investors remain conflicted about the future, a little paradox can be a good thing.
On one side, people who recognize the dynamism driving the economy are hungry for a way to capture all that energy. In a world where overall growth is flat, they want to be in the scattered hot spots.
Unfortunately, the stocks that led the market up in recent years have run out of steam. Apple Corp. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) are now a drag on growth. Other established Silicon Valley giants look no better.
Whether you call that group the “FANG” or use some other term, they still account for about 14 percent of all the cash flowing through Wall Street. When they stall, it’s hard for everything else to overcome it.
That’s why I don’t recommend those stocks. Plenty of smaller technology companies are doing astounding things right now and these companies should remind veteran investors of why the FANG stocks became so popular in the first place.
Forget Netflix Inc. (NASDAQ:NFLX) with its spotty track record of profitability and 30 percent sales growth. Roku Inc. (NASDAQ:ROKU) is easily expanding 15 percent faster.
Roku makes the devices that stream programming from Netflix and its rivals to televisions. If anyone wins the streaming TV wars, this company will share the glory, without spending a fortune to develop its own shows.
Call it a “baby Netflix” if you like. At 13 percent the size of the streaming giant, Roku is where investors who can tear themselves away from past winners to capture a taste of the future are going.
Likewise, I’m a fan of Twitter Inc. (NYSE:TWTR) over Facebook Inc. (NASDAQ:FB). Mark Zuckerberg’s social media behemoth has had its run. Twitter is far from mature.
That’s only half of the story. As Treasury yields recede, risk-averse investors are still locking down dividend-paying stocks in the most defensive sectors they can find.
That means utilities are in play. We’ve been having a lot of fun there in my new 2-Day Trader service with 10 straight profitable trades since its launch. Any high-yield stock with a reliable business is doing well.
All the evidence you need can be found in Domtar Corp. (NYSE:UFS), which makes paper products. It’s a simple, steady business that has generated a lot of cash for Value Authority subscribers and other shareholders.
That stock is up 5 percent since Sept. 3 and it still pays a yield above 5.5 percent. People are locking these yields in across the consumer products sector, Big Pharma and other sometimes “sleepy” themes.
If the sleepy side of the market is roaring now and the growth spots keep soaring, we’ve got a recipe for a rally ahead. Let the stocks in the middle find their own way.
CANNABIS CORNER: BIGGER ISN’T BETTER
Big Cannabis took a critical turn this week, with the major cultivators I track rebounding 13 percent. They still have a long way to go before reversing all the summer’s losses, but this is a step in the right direction.
The catalyst, ironically, was industry giant Aurora Cannabis Inc. (NYSE:ACB) deciding to exit its 10 percent stake in relatively tiny Green Organic Dutchman Holdings Ltd. (TSE: TGOD).
In theory, the investment gave Aurora the right to buy 20 percent of Green Organic Dutchman’s crop at wholesale prices. This would boost its overall capacity at a reasonable price, while keeping the door open to a full-fledged acquisition.
But the reason markets are cheering is that cashing out now demonstrates that Aurora’s management recognizes that boosting production is not the goal. This is a commodity business. More supply is not good.
Sometimes you need to give demand time to catch up with supply. For Aurora, there’s evidently enough cannabis flowing through the system now. They don’t need more.
And since Aurora bought into TGOD early, they’re exiting the relationship with roughly a 70 percent profit. Other investors who believe in TGOD as a going concern can take over from here.
What turned the Big Cannabis stocks around this week was the simple admission that they’ve gotten too big. It’s time to get smaller.
Likewise, we’ve steered clear of all but the best Big Cannabis cultivators in my Turbo Trader “Marijuana Millionaire Portfolio.” The stocks are too big for their business models.
I think it’s time to get a little smaller. Companies like TGOD may be where the real future of this industry will play out.
After all, the FANG stocks of Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google, more formally known as Alphabet (NASDAQ:GOOG), have run out of steam. It’s time for the baby tech stocks to take their place. That’s true in any mature industry. Cannabis is no exception.
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