From Panic to Profits: Why a 10% Gain Is Just the Start
Robert Ross|August 27, 2024
Wall Street was in full panic mode a few weeks ago.
But I wasn’t. While most investors were losing their heads, we used the “VIX spike” to our advantage and added to our long-term positions.
It may not have felt good to hit the “buy” button that day (August 6). But our timing couldn’t have been better.
The index is up nearly 10% from the August 5 lows.
If you listened to me when I pounded the table on buying stocks a few weeks ago, you should be very happy today. And while I’m obviously thrilled about that, the big question is…
Where are markets headed next?
Up and Away
Stocks are back in the driver’s seat.
And history shows the trend is likely still “up.” For instance, when the S&P 500 pulls back 5% and makes new all-time highs within a short period of time, there are virtually no cases of a 10% pullback in the following quarter.
In fact, 30 out of 31 times… stocks were higher a quarter later.
Here’s another reason the trend is our friend…
The CBOE Volatility Index (VIX) dropped 62% in the nine days leading into August 9. That’s the biggest volatility crash in history…
Following big VIX declines in the past, the S&P 500 has been higher one year later 100% of the time with an average total return of 14.3%.
But these historical trends aren’t the only factors working in the market’s favor.
This Bull Market Is Still Young
This bull market potentially has years left to run.
It’s just 20 months old. On average, bull markets last 40 months, or 3 1/2 years. Historically speaking, we’re just getting started.
That doesn’t mean there won’t be pullbacks… and you should expect them. However, bull markets often endure challenges. For instance, the bull market that began in 2009 lasted for more than 11 years. It navigated multiple corrections and crises like the European debt crisis, the taper tantrum of 2013, and the trade war tensions between the U.S. and China.
The market’s resilience is a testament to the underlying strength of the economy and the companies that drive it.
But especially when earnings continue to surge, you want to stay long the market.
Earnings in the Driver’s Seat
Investors like to make what makes stocks “go up” more complicated than it needs to be.
Many will say that it’s interest rates, geopolitical events, or market sentiment that move the market. All of those are relevant. But at the end of the day, the fundamental picture for stocks is all about earnings growth.
When companies grow their earnings, their stock prices follow. Earnings are the fuel that drives stock prices higher. In the long run, nothing else matters.
And earnings are growing… fast. Since the October 2022 lows, forward earnings expectations for the S&P 500 have grown from $227 to $264…
And while earnings for the Magnificent Seven tech stocks were not perfect, nearly every one of those key seven stocks topped their earnings estimates.
Now, I’m not saying everything is perfect in the market. One headwind I’m watching closely is the U.S. dollar. Since April, a depreciating U.S. dollar has been a tailwind for U.S. stocks…
The U.S. dollar index is currently at a key support level. If we get a bounce, I expect some near-term market weakness.
But as Peter Lynch famously said, bull markets tend to climb a “wall of worry.” There are always things to worry about in the market. That is the market’s “steady state.”
That said, you need to keep your head when everyone else is losing theirs… much like we did on August 6. Because holding your positions is harder than it looks when it seems like the global economy is collapsing around you.
But my Breakout Fortunes subscribers are doing exactly that. That includes buying some high upside options during the yen carry trade pullback earlier this month (we’re already up 50% on this position).
But either way, don’t let the financial media scare you into panic selling.
Because the future of the bull market looks bright.
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
