Indicators of a coming bull market launch are everywhere – both traditional signals and unique developments. They are a remarkable combination, and July is an excellent month for the next stock bull market to launch.
Traditional contrarian signals
- Negative interpretations and forecasts are pervasive
- Bearishness and negative sentiment are at new high levels
- Investors and press continue to fret about old bull market winners’ plights instead of focusing on the new bull market ahead. (Old bull market drivers do not repeat after a major selloff)
- Recession risk is widely proclaimed, but without identifying excessive growth areas that need winding down (the primary cause of a recession)
Unique developments ignored and misunderstood
- Contrary to news reports, the Fed is not tightening. Far from it. Instead, it is still running its two-pronged easy money policy. The interest rate increases made so far are only small reductions in the easing. Actual tightening cannot occur until the Fed’s two easing policies are fully reversed, not just lessened. First, it needs to sell all the trillions in bond holdings bought with Fed-created demand deposits (new, excess money). Second, it needs to return the role of interest rate determination to the capital markets where it belongs. Only then will capital markets and the financial system be fully functioning again.
- News reports lack positive developments from interest rate rises. Rising rates are just beginning to benefit those harmed by the Fed’s 13-year low-rate policy. This inordinately long period of mostly near-0% short-term interest rates (with -2% inflation eating away at purchasing power) abused people and organizations who depend on such interest income. They include savers, investors, retirees, pension funds, state/local government funds, nonprofits, financial companies – namely, any person or organization that is required to hold or desires to hold short-term securities or deposits). These short-term assets are multiple trillions.
- Inflation measures are catchalls that include normal supply/demand price moves (both up and down) along with “fiat money” inflation. The latter is what matters because it is the general loss of purchasing power for a currency. Its primary cause is excess money supply. It excludes product/service price changes caused by specific demand/supply effects (e.g., by vehicle shortages). Likely, fiat money inflation is running around 5% currently, not the 12-month 8.6% recently reported. That latter number included 35% price gains (May 2021 to May 2022) for energy (representing 8.3% of the CPI’s consumer spending “basket”), and 14% for new/used cars and trucks (8% of basket). For comparison, all “services” was 5.2% (56.9% of basket).
- Investor inactivity is being misinterpreted by some as a sign of worse to come. However, all bear markets are unique and can end in any way they please. For example, the Great Recession bear market ended with two weeks of a low activity downward drift. This one appears to be forming a choppy foundation that will launch the next bull market. If so, that means an investor waiting to buy in anticipation of a fear-based selloff (investor capitulation) could end up chasing a rising market, hoping for a dip/drop/reversal that never comes.
- The final 2021 flameouts combined with Wall Street’s trading are creating a market choppiness that disguises the foundation building going on. The major 2021 bull areas were SPAC (special purpose acquisition companies), biotech IPOs, weak company IPOs, meme stocks, tech-anything and non-earning hot-story companies.
- Index funds, including ETFs, are so entrenched in investment advisory thinking that an exceptional replacement awaits: Actively managed funds. Active managers “win” when big, past favorites tire out. The indexes must stay fully invested in them at their large market capitalization weights. Active managers are free to select both the companies and position sizes. Past performance favors passive? Just wait. As the saying goes, “past performance is no guarantee of future results.”
- July begins a new earnings season which could be the launch point for the next bull market. “But, couldn’t the company results be weak for the April-June quarter?” Yes, and we should wish for even weaker earnings brought on by inventory dumping, restructuring, employment adjustments and write-offs where possible. If that happens, it could be a positive indication that management is clearing the decks for coming profitability and growth. More than the earnings results, management outlooks are key. They should describe the challenges the company has been facing followed by the steps and strategies the company has instituted to counteract and take advantage of them.
The bottom line: Don’t fret inflation, higher interest rates, Fed “tightening,” or an imminent selloff
Not only are the concerns ill-founded, their widespread discussion diminishes their importance and relevance. With that much notoriety, any effects are already baked into the stock market. Therefore, focus on the unmentioned issues above.
As to a strategy for this time, I have previously discussed my preference for being invested now in actively managed mutual funds. As much as I enjoy picking stocks, I believe the next bull market will be especially different from the past. That means active managers at firms with good analytical staffs are in the best position to unearth the companies with excellent return prospects.
The four funds I have chosen are the following:
- Vanguard Windsor Fund (value fund)
- Vanguard Growth & Income Fund (growth and value blend)
- Vanguard Explorer Fund (specialty growth fund)
- Fidelity Focused Stock (specialty growth fund)
Each Vanguard fund is multi-managed by independent investment management firms chosen by Vanguard. The reason for using multiple managers is that each has a different investment approach. Combined, they can capture the new bull market’s many components. Additionally, they provide diversification that helps control the fund’s risk.
Fidelity has a history of pursuing higher return potential. The chosen fund has two desirable characteristics: a concentrated design that lets the manager focus on top opportunities and a smaller size that allows for timely trades.