Navigating the Market as the U.S. Economy Recovers

Sheraz Mian
·10-min read

The stock market’s recent behavior has been nothing less than spectacular and one for the record books.

The major indexes have recouped their Covid-19 losses and are now close to the all-time high level achieved in early September. The rebound followed the sharpest market downturn in history, in which stocks lost more than a third of their value after peaking on February 19th.

The market rebound that got underway on March 23rd still continues, as economic readings show the U.S. economy steadily coming out of the downturn. But there are those with less optimism about the outlook given the ongoing resurgence in infection levels. The market has been trying to balance these competing views about the outlook, resulting in the major indexes drifting sideways in recent days.

So where do we go from here as the U.S. economy continues to recover even as parts of the country experience rising infection rates? 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.

1) Looking Past the Downturn: The pandemic dealt the U.S. economy a severe blow whose effects will likely linger for a while.

Markets can see through to the fact that the U.S. economy entered this downturn in the best possible shape, with household and business confidence at near record levels on the back of a multi-decade low unemployment rate, rising wages and record corporate profits.

Irrespective of whether the shape of the recovery resembles a ‘V’ or ‘U’, there is little doubt that pent up demand effectively guarantees a very strong rebound, as recent data about business and consumer spending, housing and other areas already show.

That said, some parts of the economy will likely remain under pressure until we completely see the back of this pandemic.

2) Unprecedented Policy Response: Congress has been unable to extend the relief measures that expired in the Summer, with the measure likely being taken up after the elections. But the scope and magnitude of fiscal and monetary measures already in place are without parallel in history.

The relief measures helped replace lost wages for workers, assisted small businesses in staying open and staved off solvency issues in industries hit hard by the pandemic.

This ensured that households and businesses will have sufficient liquidity to navigate the downturn and serve as a bridge to the other side of the pandemic. The U.S. economy’s strong rebound in Q3 provides ample evidence that these measures have been very effective, though more likely need happening to sustain the recovery’s momentum.

More . . .


------------------------------------------------------------------------------------------------------

5 Stocks Set to Double: Sunday Deadline

There's still time to get in on our 5 Stocks Set to Double. Each is the single favorite of a Zacks expert with the best chance to gain +100% and more in the months ahead:

1. A unique product-as-service model that makes working with contractors as easy as buying on Amazon.  

2. A company with an omnichannel platform that’s partnering with a home improvement retailer to expand distribution.  

3. An exceptional hybrid organization that deserves a valuation similar to the rest of the S&P 500.  

4. A big-name company that’s poised to ride strong digital capability, loyal subscribers, a growing global wellness trend, and A-list celeb endorsements.   

5. An undervalued company that’s ready to move thanks to a new strategic partnership and earnings trending upward.

Deadline to download this just-released Special Report is midnight Sunday, November 1.

See Stocks Now >>

------------------------------------------------------------------------------------------------------


3) Strong Banks Mean Smooth Recovery: Regulatory reforms instituted after the global financial crisis ensured that the U.S. banking sector was in rude health as the pandemic arrived.

Banks’ profitability suffered a severe blow as they built up reserve cushions in preparation for pandemic-related credit losses. But the group has faced the challenge head on, as banks’ recently released Q3 quarterly results show. Importantly, banks have the financial wherewithal and capital cushions to operate on their own and not need the U.S. Treasury or the Federal Reserve backstopping them, as was the case back in 2008.

Banks are the lifeblood of the economy as they ensure the efficient transmission of capital to different economic actors. The successful implementation of the aforementioned small-business relief program has been possible only because of the health of the banking sector.  

The Fed’s monetary policy stance remains favorable and supportive of the market. What this means is that it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future.

Let's see what the Bears have to say in response.

1) Market Complacency about Economic Recovery: The stock market’s strong rebound from the March 23rd lows suggests a best-case scenario for the U.S. economy, with the bulk of economic pain concentrated in Q2 and a strong recovery getting underway in Q3 and accelerating after that.

It is unlikely that the recovery will be swift or strong for two main reasons. First, key parts of the economy are simply incompatible with social-distancing measures which have to remain in place until an effective vaccine is available to combat the pathogen. Second, the pace and magnitude of the economy’s recovery will lose some of its momentum as a result of fresh infection outbreaks.

The recovery has gotten underway, but it will likely be slower and more drawn out than many in the market are banking on. 

2) A Durable Hit to Confidence: The risk to human life, a function of the highly contagious pathogen, is a unique aspect of this economic downturn. As a result, previously benign activities like eating out or taking a flight or any activity that involves physical interaction with others has been weaponized.

This is a big blow to confidence that is unlikely to go away until we fully see the back of this pandemic, which will only happen after an effective vaccine arrives. 

3) The Market’s Fed Addiction: The market’s Fed dependence has only increased as a result of this pandemic. The central bank not only cut interest rates to near-zero, but has been playing an active role in ensuring market liquidity and backstopping corporate balance sheets.

In other words, the Fed has reinitiated on open-ended quantitative easing or QE program that will significantly expand its balance sheet. The Fed’s balance sheet currently stands at more than $7 trillion, up from $4.29 trillion in early March, with the expansion far from over at this stage.

It is unfashionable to be concerned about growing fiscal deficit and the associated ballooning Federal debt as everyone seems to have subscribed to the so-called ‘modern monetary theory’, or MMT, that calls for open-ended and unlimited borrowing.

This may not be an issue in these unsettled times, but we know that there is no such thing as a free lunch and that debt always needs to be paid back.

Where Do I Stand?

I don’t dismiss the bearish arguments entirely, but I don’t see them adding up to an extended downturn for the U.S. economy and an end to the spectacular rally we’ve seen so far since it got underway on March 23rd.

The reality is that we have learned enough during the lockdown to navigate this transition period when we engage in economic activities even as the pathogen is still amongst us. The health of the U.S. economy ahead of the pandemic and the very strong fiscal and monetary response, coupled with pent up demand, ensures that the economic recovery will only gain strength going forward.

The worst of the pandemic’s economic and corporate earnings impact is already behind us, with the picture already starting to improve. As regular readers of my earnings commentary know, the earnings picture has notably improved with estimates for Q4 and beyond starting to go up in recent days.

Markets are forward-looking pricing mechanisms; they have already discounted the pandemic-driven growth hit and is looking forward to the aforementioned turnaround in earnings outlook. Continued confirmation of this favorable trend will further strengthen bullish sentiment in the market.

These are historic times for the economy and the market. And historic times create historic opportunity.

All in all, this is the best time to be fully invested in the market, particularly if you are investing for the long haul.

And I would definitely be a buyer on any dip because with expectations for unprecedented economic growth for the remainder of the year, and annual GDP growth next year to be the strongest in 38 years, it looks like there's a lot more upside to go.

Where to Look and How to Get Started 

Today is an ideal time to take advantage of this historic time for our economy and the market which is why I'm inviting you to look into our unique arrangement called Zacks Investor Collection. In 2019, our long-term portfolios closed 55 double- and triple-digit gains. Already in 2020 there have been 47 more, including several wins in our Stocks Under $10 portfolio as high as +117.8% on PharmAthene, Inc., +142.9% on Lattice Semiconductor Corp. and even +475.8% on Digital Turbine Inc.¹

Even better, Zacks Investor Collection gives you access to 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.

To put the odds of success even more in your favor despite the recent ups and downs, our Special Report, 5 Stocks Set to Double, reveals 5 stocks handpicked by Zacks experts that have tremendous upside potential.

Each is the personal favorite of a Zacks expert to have the best chance to gain +100% and more in the months ahead:

Stock #1 – Its 500% Growth Surpasses Tesla, Esty, and Zoom
Unique product-as-service model makes working with contractors as easy as buying on Amazon. Now in 160 countries, this booming mid-cap has expanded from 8 to over 400 categories. And the best is yet to come!

Stock #2 – Rush to Outdoors Drives Huge Demand for Products 
This company stands out with double-digit sales growth, rapidly growing customer base, and an omnichannel platform. It’s partnering with a home improvement retailer to expand distribution. Now is the time to get aboard.

Stock #3: Online Retailer Can Compete with Amazon
With soaring earnings and sweeping cuts to selling and administrative expenses, this unique hybrid organization deserves a valuation similar to the rest of the S&P 500. This alone could double its stock price.   

Stock #4 – Wellness Leader on Right Path at Right Time
Big-name company is poised to ride strong digital capability, loyal subscribers, a growing global wellness trend, and A-list celeb endorsements. Shares are CHEAP but not for long.

Stock #5 – Much-Loved Beverage Primed for Stock Turnaround
Even with restaurants and bars closing, the alcohol industry continues to be ranked sky-high. With new strategic partnerships and earnings sweeping upward, this company is drastically undervalued and ready to move.

The earlier you get into these stocks the higher their profit potential. Also, the opportunity to download this bonus report, 5 Stocks Set to Double, ends midnight on Sunday, November 1.

Get started now with Zacks Investor Collection and 5 Stocks Set to Double >> 

Thanks and good trading,

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.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research