by Jason Bodner

June 29, 2021

The news loves to harp on bad vibes because bad news sells, but I don’t really follow the news. I prefer to follow the Big Money. That’s how to find outlier stocks. Looking back at the quarter now ending, I saw loads of bad news. Despite that, I think we are setting up for the new “Roaring 20s” of the 21st century.

Compared to a century ago, if we look back at the pandemic of 1917-19 vs. COVID in 2019-21, we see some distinct parallels and distinct differences. First, here are some of the similarities:

  • They were both deadly pandemics.
  • They both led to economic shutdowns.
  • Masks became an important political and social symbol both times.

Here are some huge differences:

  • The Spanish Flu of 1917 came in conjunction with a world war – World War I.
  • The Spanish flu was way worse than COVID, infecting an estimated 500 million people, of whom at least 50 million died. The world population was 1.8 billion then (one-fourth today’s level). Therefore, the Spanish Flu was 12 times more infectious and 55 times more deadly.

Big Differences Between Spanish Flu and Covid Table

Economic impacts were huge for both. Life stopped: schools, businesses, and restaurants shuttered. Travel stopped. Everything went “on hold,” as we waited for vaccines to arrive. In both cases, they did.

It’s important to compare these events, because while the 1917-19 Flu pandemic was far more severe, it paved the way for the most prosperous boomtime economy in modern history: The Roaring 20s.

The 1920s saw America’s economy grow by 42%. Years of pent-up demand meant consumers flooded the economy with cash when they could. Advertising coincided with mass production to push products into every household. Modern automotive and airline industries were born in the wake of the pandemic. Progress, excess wealth-creation and high-life all blossomed after the last lockdown prior to COVID.

I think we’re about to see that type of prosperity happen again.

First off, the stock market is a forward-looking machine. Stocks react to what investors think will happen 6-12 months from now, giving investors ample opportunity to position themselves. This is precisely what happened with Big Money investors immediately after COVID shut down the U.S. economy.

MapSignals Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

“But if the market thinks ahead, aren’t stocks already at the level where investors think they should be?”

The answer is yes and no.

Yes, stocks were bought ahead of a major recovery. And yes, the S&P 500 has rallied an astonishing 90% since the March 23rd, 2020, low, but this also alarms folks because the P/E ratio has gone sky-high at 45x!

Price to Earnings Ratio Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Before you freak out, I must fill in the necessary details: Investors are missing a very key thing. The price-to-earnings ratio is based on trailing 12-months earnings, meaning investors bought stocks all the way up to 45 times the last 12 months of earnings – the year of a massive economic shutdown – but if we look at the 12-month forward P/E ratio (based on forward estimates) of the S&P 500, things start coming back to reality. It is currently 21x and falling, down 3.59% from last quarter and -10.70% from a year ago.

Many people miss the fact that a high P/E ratio doesn’t automatically mean an overvalued market. In fact, in rare circumstances like now (after a pandemic), it may actually mean an undervalued market.

When they seem out of whack, P/E ratios can come back inline two ways:

  • Prices can fall to meet earnings – this means lower stock prices, or a correction; or
  • Earnings can rise to meet prices – this means higher stock prices and a possible big bull run.

It’s simple math: Price/Earnings is the P/E ratio. If the denominator (earnings) improves, the bottom number rises, which means the ratio declines. That’s what’s happening now.

I believe analysts have it all wrong. Look at Q2 earnings results for the S&P 500:

  • 86% of S&P 500 companies reported a positive EPS surprise and 77% reported a positive revenue surprise.
  • The estimated earnings growth rate for the S&P 500 is 61%. That would be the highest reported growth rate since Q4 2009.
  • Eight sectors have higher earnings growth rates today (compared to March 31) due to upward revisions to EPS estimates.
  • 63 S&P 500 companies have issued positive EPS guidance.

As Q2 began, Big Money sold growth stocks to buy value. It was a rough time for growth investors. Inflation and rate hikes were suddenly the worry du-jour. Now, things are changing. The Fed announced that rates will remain low through 2023. Inflation fears are thawing, possibly due to the realization that the Fed can continually print money to be accommodative. Now value is falling, and growth is back.

In other words, rates will remain low, which is great for growth stocks. Money is gushing into the economy. Vacations and restaurants are booked with a waiting list. Movie ticket sales are surging.

The lockdown is unlocking. Spending is catching up. One effect from lockdown was savings rates going through the roof. For 10, years U.S. savings rates averaged near 7%. In March of 2021, savings hit 32.2%.

This money is now looking for new places to be spent. Vaccination acceleration will only increase spending. This will rejuvenate the economy and fuel stocks, especially growth stocks.

Normally, economies don’t stop suddenly, but ours did in 2020. Now it’s starting to revive.  Stocks will surge, led by growth. And the best of these companies are the outlier stocks. Outlier stocks being bought by Big Money is where outlier gains are. That’s where I’ll focus.

“The difference between the greats and the legends is their ability to focus for longer periods of time.”

-Jordan Burroughs

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

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Sector Spotlight by Jason Bodner
Are the New “Roaring 20s” About to Begin?

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About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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