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Big Stock Market Gains Could Be in Our Future

Matt McCallMatt McCall's Daily Insight

Investors are focused on inflation...

Everyone knows that the costs of goods and services have risen sharply this year. You've probably noticed it at the gas station and in the grocery store. And I'm sure you've felt the pinch of inflation on your wallet.

I mentioned on Monday that we'll soon see how inflation unfolds during this holiday shopping season. But for now, I want to look at how investors are viewing inflation today and how it relates to the economy.

Then, we'll take a look at the Nasdaq Composite Index. History suggests that big gains are likely after stocks hit a bottom... So, are we getting close?

Headline No. 1:

"Stagflation" is the consensus view.

McCall's Call: Rising costs directly impact consumers' ability and willingness to spend their cash...

That's important because consumer spending has an outsized impact on the economy, making up about 70% of the U.S economy. So when consumers rein in their spending habits, the economy often slows.

That's exactly what we've seen happen this year. Inflation has spiked higher, the costs of goods and services have risen, and the economy has cooled off. This type of economic environment is often described as "stagflation" – when inflation rises while the economy contracts.

According to the Bank of America Global Fund Manager Survey, a lot of investors believe that we'll be stuck in this market environment for the next year.

As you can see in the chart below, nearly all fund managers agree that inflation will remain high and that there will be little economic growth over the next year (the light green line). Almost no one believes that the economy will grow and that inflation will cool off (the yellow line).

I like keeping an eye on these surveys. They provide insight into how others view the economy today. But more importantly, I like to see when almost everyone agrees on one viewpoint...

Because they tell me to expect the exact opposite...

Consensus views make sense in everyday life. People like to fit in and be part of a community. So it's easier to "go with the herd."

But while it may be easier, it can be dangerous in the stock market. When most folks share the same outlook on an asset or an idea, it's often near an important turning point.

Today's consensus is that we're headed for another year of stagflation. But I don't think that's likely. There are signs that inflation has already peaked. And if it continues to fall, there's a good chance that economic activity will pick back up.

Regular readers know that I travel often, and I can tell you that I'm not seeing signs of a slowdown. My flights are full... the airports are busy... and many restaurants are packed. In general, people are out spending their cash.

So I think it's a much better time to be a contrarian. Most folks don't agree with me – as this survey shows. But I'd wager that the U.S. economy will be in a better position on inflation and growth a year from now.

Don't get swept up in the crowd... There are still plenty of opportunities out there for investors right now.

Headline No. 2:

History tells us that we could be in for a nearly 20% rally in the Nasdaq Composite Index.

McCall's Call: This past Saturday marked one year since the Nasdaq last made an all-time high. From that all-time high to its recent low on October 14, the index fell 35%. That marked its lowest level since July 2020.

But in the month since, stocks have bounced back – with the Nasdaq up 8% through yesterday's close.

That's a strong rally... And it's being helped by the historic amounts of investor pessimism we're seeing in the market, as we just talked about above.

I can't say whether we've hit bottom or if stocks will decline further. And as regular readers know, trying to predict an exact bottom is impossible and pointless. Anyone who tells you otherwise is lying. But that doesn't mean you shouldn't try to buy near a bottom...

That's how you realize outsized gains in the market.

Based on the Nasdaq's recent action, we could be in for a strong rally in the months to come. Take a look at the Bespoke Investment chart below, which looks at the index's forward 12-month performance based on how stocks fared over the previous year.

The worst 12-month gains came when the Nasdaq had soared over the previous year. And when the Nasdaq more than doubled over a 12-month period, watch out – the index averaged a decline of more than 50% over the following year.

However, when the index is down over a 12-month period, it's usually a good thing for stocks.

So... what does that means for today's market?

The Nasdaq has declined about 30% over the past year. That fits the current market into the "30% to 39% decline" segment of Bespoke's study. And in those cases, the index climbed over the next 12 months 73% of the time.

And it's not just up – it's up big.

The Nasdaq averaged an 18% return in those instances. That's nearly double the average return of the stock market in all periods!

Remember... I'm not saying we've bottomed just yet. But if we haven't hit bottom, I believe we're close. And that means there are big gains in our future.

The only thing we can do as long-term investors is get ready now.

Here's to the future,

Matt McCall
Editor, Daily Insight
November 23, 2022

P.S. Our offices will be closed tomorrow and Friday for the Thanksgiving holiday, and my team and I are taking a few days off to spend time with our friends and families. We'll be back to our normal schedule next week, so you can expect your next issue of Daily Insight Monday afternoon.

I wish you and your loved ones a happy, safe, and healthy Thanksgiving!

Did You Miss My Latest Podcast Video?

It's Thanksgiving week – one of the busiest travel times of the year. Some of you might even be reading this from a plane or train. Believe it or not, the number of folks traveling this year is nearly back to pre-pandemic levels. On this episode of Making Money With Matt McCall, I talk in depth about the upcoming holiday – which also happens to kick off the big holiday shopping season.

I share the names of five stocks that are primed for success this time of year. Think of the travel, consumer, retail, and sports sectors. And my fifth stock is a play on investing in the food many of us eat during the holiday season. These are stocks you'll want to add to your watch list today. Tune in to find out their names now.