Everyone loves a great comeback story.
Back in 2017 at Super Bowl LI, the New England Patriots faced the Atlanta Falcons in a game that has now earned the title of “the biggest comeback in Super Bowl history.”
The first half was by definition “one-sided.”
The Patriots only scored three points in the first half! And with just over six minutes left in the third quarter, the Falcons were still winning 28-3. The oddsmakers gave the Patriots less than a percentage point chance of winning the game. Clearly, the odds were against them, and Falcons’ fans were celebrating what they thought was a guaranteed victory.
But the Patriots defied the odds. Quarterback Tom Brady threw five-straight scoring drives after halftime, which included two touchdowns, with two-point conversions. The Patriots and the Falcons were tied at the end of the fourth quarter. Overtime.
Well, if you’re a fan of football, you might know what happened next. The Patriots won the coin toss, and after five complete passes from Brady, James White carried the ball two yards into the endzone. The Patriots claimed a 34-28 victory—and grabbed another Super Bowl ring.
As investors, I think we can learn a lot from the Patriots’ comeback in Super Bowl LI.
During the first six months of the year, U.S. economic growth slowed dramatically. The preliminary second-quarter GDP report showed the U.S. economy contracted at a 0.9% annual pace, following up the 1.6% annual contraction in the first quarter. Two-straight quarters of negative GDP growth signals the dreaded R-word… Recession.
Part of the reason for the drop off in economic growth was the surging costs for virtually everything. Prices were already climbing around the world as economies reopened in the wake of the pandemic, but the Russia-Ukraine conflict drove inflation to historically high levels.
Here in the U.S., the Federal Reserve’s favorite inflation indicator, the Personal Consumption Expenditures Price index, increased 6.8% in June and breached its highest level since January 1982.
Long-term Treasury yields also soared in the first half of the year. The 10-year Treasury climbed from 1.63% at the start of 2022 to a high of nearly 3.5% in mid-June. The 10-year Treasury yield currently sits at around 2.8%. Typically, rising Treasury yields trigger falling stock prices—and the bears latched onto this and declared “growth is dead.”
The odds were clearly stacked against the bulls, as the first half of 2022 was “one-sided” with the bears in control of the stock market. The NASDAQ plunged 34% from its November 2021 highs to its mid-June lows1. The S&P 500 dropped 24% from its January highs to its mid-June lows2. A 20% or more decline from recent highs… Bear market.
But, folks, the game is not over.
Persistent institutional buying pressure overpowered the bears in July, with the S&P 500 experiencing its best July since World War II. The index was up more than 9%! I should also add that the NASDAQ reentered bull territory in mid-August.
Clearly, the bulls came out of halftime ready to fight—and if history repeats, the bulls could be on the verge of a stunning second-half comeback.
5 Reasons for a Second Half Comeback
Louis Navellier, here, and in my opinion, growth always wins.
Now, that’s not a popular sentiment these days, with rising interest rates, a more hawkish central bank, slowing economic growth and a stock market still clawing its way back from a bear market. So, rather than just say “trust me,” I’d rather show you why I think growth stocks should have the upper hand in the final months of 2022.
Nothing is guaranteed and the last few years have proved that over and over again.
So we’re going to look at the data, not what we hope will happen in the remainder of 2022.
Numbers do not lie—and the data right now is pointing to the potential for higher stock prices by yearend.
Reason #1 – Strong Quarterly Gains Follow Big Quarterly Losses
When we closed the books on the second quarter, the S&P 500 had experienced its worst first half in more than 50 years. And it wasn’t alone—all of the major indices dropped dramatically in the first six months of the year.
When the market closed on June 303, the S&P 500 was down more than 20%, the Dow had fallen 15%, and the Russell 2000 had dropped nearly 24%. The tech-heavy NASDAQ, though, led the way lower, with nearly a 30% decline in the first six months of the year.
So, if you’ve been looking for good news after the dismal first six months of 2022, here it is:
The folks at Bespoke recently pointed out that the S&P 500 tends to rally strongly after it declines 15% or more in a quarter.
The S&P 500 fell about 17% in the second quarter. In the previous eight instances when the S&P 500 slipped 15%, the index has bounced seven out of eight times in the following quarter and eight out of eight times in the following six months and 12 months. Breaking it down further, the S&P 500 has posted an average 6.22% gain the following quarter, a 15.15% gain in the following six months and a 26.07% gain in the following 12 months.
The even better news is that we’re already starting to see this play out.
The market actually had a positive start to the third quarter—and is well on its way to repeating history with a strong quarterly gain. The S&P 500 just posted its best month since 2020, as the index soared an incredible 9% in July!
Reason #2 – S&P 500 Breaks Above 50-Day Moving Average
Thanks to the rebound in July, the S&P 500 broke its 60-day streak of trading below its 50-day moving average on July 19. Since the end of World War II, the S&P 500 has strung together closes below this level for 50 or more days 31 times. In 10 of these instances, including the most-recent occurrence, the S&P 500 broke the streak with a 2% or more rally.
Why is this important? Well, according to the folks at Bespoke, the stock market rallied strongly in the prior nine instances. In fact, once the streak ended with a 2%+ gain, the S&P 500 went on to post median gains of 3.2% in the following three months, 11.2% gains in the following six months and 20.9% gains in the following 12 months.
Even when you consider all of the 30 previous instances of the S&P 500 ending its more than 50-day streak of closing below its 50-day moving average… the index rallies an average 4.35% in the next six months and 8.93% in the following 12 months.
Since the S&P 500 rose above its 50-day moving average on July 19, the S&P 500 has already rallied nearly 8%4! So, it appears the market is on the right track to follow historical precedence and could end the year with above average gains.
Reason #3 – Market Is Still Oversold and Due for a Bounce
Even with the market’s stunning rebound in July, the “chicken littles” on Wall Street haven’t been afraid to still proclaim that the “sky is falling.” The fact is fear sells—and the financial media does its best to scare folks out of the market. But I hope you can tune out all the negative chatter…
Jason Bodner, who writes Sector Spotlight in the Navellier & Associates weekly Marketmail, recently pointed out that all the stories of red-hot inflation, rising rates, the Russia-Ukraine war and soaring food and energy prices have distorted reality—and the market is now in an oversold position, even with the July rebound. But that might actually signal there is a light at the end of the tunnel.
“As the headlines tout vicious inflation numbers and we all feel it at the pump and grocery store, the fact is that “core” inflation (minus food and energy) is falling. So, the most wicked inflation is mainly isolated to life’s essentials. With higher prices for essential food and energy, that leaves less for discretionary items.
That, in essence, is ghost tightening. Telegraph scary language and let the market do the heavy lifting for you. That’s exactly what I would do if I were running the Fed, because with a $30 trillion national debt, I can’t raise rates too high. That would cripple the economy for far longer than some temporary inflation.
That’s what I think is happening behind the scenes, and that’s what’s behind the headlines of gloom and doom. That’s why I believe that stocks will bounce around a bit in the third quarter before rising again. The Fed will have two more FOMC meetings to raise interest rates and then stop. November’s meeting is right before the election, and the Fed doesn’t want to interfere with elections. By then, we should have solid evidence of slowing inflation, so the Fed will enter a holding pattern. By then, economic data should improve. That sets us up for a big fourth-quarter liftoff, especially for the over-punished growth stocks.
First and foremost, our most powerful indicator has entered oversold territory, which has happened only 22 times since 1990 – and it happened not once but twice this year! The Big Money Index (BMI) went oversold on May 24th and again on July 14th.
Our 32 years of data says that when the BMI hits oversold you should expect a big bounce in stocks.
Simply put, when the BMI goes oversold, the forward returns are nothing short of spectacular. Just look at the average returns:
- 1 Month returns: +2.7%
- 3 Months: +5.2%
- 6 Months: +9.2%
- 12 Months: +15.3%
- 24 Months: +29.8%
So, how did we do since the latest occurrence on July 14? The NASDAQ tracking ETF (QQQ) rose 13.2%, and the S&P 500 tracking ETF (SPY) rose 9.8% in under a month, so the oversold BMI strikes again!
But is this a bear squeeze, or the start of a bull run? Moving to our next layer, we start to get a clearer picture. Keep in mind, the BMI is a 25-day moving average of all unusual buying and selling signals. If we look at these signals daily in the chart below, we start to see something interesting. We’re suddenly seeing the most buying we’ve seen all year. This buying started July 27th, and so far, hasn’t looked back:
We’ve also seen recent buy spikes in utilities, industrials, healthcare, and staples, which puts more weight behind the theory of a new bull market forming. But what about the other sectors? While less significant, we still see buying in communications, real estate, and financials.
The only two sectors not seeing significant buying right now are materials and energy. But we can give them a break, because energy has been the strongest sector from the beginning of the year through this summer, and materials also had a strong showing. So, if they are taking a pause while big money flows into the other nine sectors, I’m not particularly concerned.
I’d also like to point out that there has been notable buying in small- and mid-cap stocks. Typically, in a bearish tape, large- and mega-cap shares attract capital because they are viewed as more stable.
Could this be a short squeeze? Sure, I must concede that as a possibility. In fact, I think it’s a given. But that, in and of itself, is a great sign. The market is a forward-thinking machine. I believe the realization is setting in for investors that perhaps the economy and overall situation are not as bad as everyone is making it seem. The case for shorts is dwindling as shorts cover their positions and stock-squeeze value hunters step in thinking there’s an “all clear” to buy. This can build a foundation for a new greed cycle of the market.”
There is a light at the end of the tunnel, folks! As Bodner pointed out, individual and institutional investors have grown more confident and decided it was time to take advantage of the market’s depressed prices in beaten-up industries and sectors. This bargain hunting has created persistent institutional buying pressure that has overpowered the bears on Wall Street recently—and that could be setting us up for a big yearend rally.
In fact, the buying pressure has only intensified in light of recent inflation data…
Reason #4 – Inflation Has Moderated (And Investors Are Finally Cheering!)
Inflation has been a thorn in most investors’ side this year—and one of the primary culprits for the market’s weakness. The reality is the Federal Reserve’s efforts to curb red-hot inflation sent Treasury yields soaring, and it’s no secret that rising rates can pinch some corporation’s profits.
But the latest data showed inflation has moderated since March—and that could inspire the Fed to think twice about even more aggressive interest rate hikes.
The Consumer Price Index (CPI) increased 8.5% year-over-year in July, down from 9.1% in June. Economists expected an 8.7% annual pace. Core CPI, which excludes food and energy, rose 0.3% in July and is now up 5.9% year-over-year. That compares to a 0.7% month-to-month rise in June and a 5.9% annual pace. The core figure was also better than expectations for a 6.1% year-over-year increase.
Now, both CPI and PPI continue to be driven primarily by soaring energy prices, but even these prices have started to moderate.
In regard to consumer inflation, the energy index dipped in July to show a 32.9% year-over-year increase, compared to June’s 41.6% year-over-year pace. For wholesale inflation, energy declined by 9%. We should continue to see energy prices decline as demand ebbs in the fall.
Clearly, inflation is still hot, but here’s what we need to remember: Core inflation has moderated since its peak back in March. Core CPI peaked at 6.5% in March, and it dipped to a 6% annual pace in May and a 5.9% annual pace in June—and held steady at a 5.9% annual pace in July. Core PPI peaked at 7.1% in March, and it declined to a 6.7% annual pace in May, a 6.4% annual pace in June and a 5.8% annual pace in July.
As long as the core CPI and PPI continue to decline, the Treasury bond rally that has been underway since mid-June should persist. The 10-year Treasury yield has dropped from nearly a 3.5% peak in mid-June to about 2.7% today. The dip has inverted the yield curve, which could prove to be a very positive development for the stock market in the upcoming months.
According to the folks at Bespoke, in the previous 17 times that the three-month to 10-year yield curve flattened by 100 basis points in 50 trading days since 1971, the S&P 500 has rallied in the next three months, six months and 12 months. Breaking it down, the S&P 500 has posted a median gain of 0.27% in three months, a 4.26% median gain in six months and a 16.07% median gain in 12 months.
So, if history repeats, the S&P 500 may essentially tread water until early October and then stage a nice yearend rally that should continue in 2023.
And it is my position and opinion that fundamentally superior stocks will lead the way higher. Let’s look at the data…
Reason #5 – No Earnings Recession in Sight
Are we in a recession? Technically, yes. The preliminary second-quarter GDP report showed the U.S. economy contracted at a 0.9% annual pace, following up the 1.6% annual contraction in the first quarter. As you may know, two-straight quarters of negative GDP growth signals a recession.
Now, it’s important to note that the contraction in the first quarter was due largely to a dramatic 7.5% drop in worker productivity. And the drop in the second quarter was primarily due to a big decline in inventories, as supply and shipping glitches plagued the market. Treasury Secretary Janet Yellen commented that the change in private inventories “shaved 2%” off second-quarter GDP. Essentially, Yellen tried to paint a picture of an “inventory recession” versus a “real recession.”
The reality is it’s an odd recession, as unemployment rates remain low—the unemployment rate dipped to 3.5% in July—and corporate earnings are still robust. As a result, I find myself agreeing with Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and President Joe Biden in their conclusion that the U.S. is not in a real recession (unless you’re in the homebuilding business).
Corporate earnings are also not in a recession!
In fact, second-quarter earnings came in much, much better than anticipated. According to FactSet, 75% of S&P 500 companies beat analysts’ earnings estimates for the most-recent quarter. The average earnings surprise is 3.4%, and the S&P 500 achieved 6.7% average earnings growth in the second quarter. To put this into perspective, analysts expected earnings growth of only 4.0% prior to the start of the quarterly earnings season.
Looking forward, earnings momentum will continue, albeit at a slower pace than previous quarters. The S&P 500 is now anticipated to report 8.9% average earnings growth for the year. Breaking it down further, third-quarter earnings are expected to grow 5.8% on average and fourth-quarter earnings are projected to rise 6.1% on average.
But, as we witnessed in the second quarter, S&P 500 companies tend to post big earnings surprises, and actual earnings growth is much higher than analysts’ initial projections. And better-than-expected earnings growth will continue to drop kick and drive fundamentally superior stocks higher in the upcoming months.
So, Can the Bulls Pull Off a Second-Half Win?
When you add it all up, it’s easy to see how the bulls could pull off a late win in the second half of the year. The market put in a firm bottom in mid-June, and history is pointing to higher stock prices by yearend. But it may be a little early to state that we’re in a new bull market, as there’s still plenty of risks that investors need to consider.
But the biggest concern to me is not whether we’re in a recession or not—someone is always predicting a recession or an economic boom. What I find most concerning is that the analyst community has started to trim their estimates for the final two quarters of 2022.
As we discussed earlier, we just experienced a stunning second-quarter earnings announcement season that defied analysts’ expectations. According to FactSet, about 75% of S&P 500 companies topped analysts’ earnings estimates for the latest quarter. But instead of increasing their third- and fourth-quarter outlooks in the wake of stunning second-quarter results, analysts have lowered their outlooks as 58% of S&P 500 companies have issued negative earnings guidance.
Talk about a red flag!
The fact is that you can’t fight the analysts. They’re like a big defensive line that’s everywhere. If you attempt to plow straight through that line, you’ll be tackled before you get anywhere close to the endzone. And, if you’re like me, you don’t want to be tackled; you want to skirt the defensive line.
To do this, you have to go into the second half with a tried-and-true strategy, a growth strategy.
For my money, our best defense is a strong offense of fundamentally superior stocks.
Personally, I’m obsessed with selecting stocks with strong sales and earnings growth, as well as positive analyst revisions. I sell when analysts are trimming estimates, and I buy with both hands when earnings momentum accelerates, and analysts increase estimates.
My fascination with growth stocks started back in the late 1970s during my college years at Cal State Hayward. I wanted to uncover how to beat the market without taking on too much risk—and I believe that a select group of stocks can consistently outperform the S&P 500: stocks with superior fundamentals.
Today, I’m a self-proclaimed “number guys” because the numbers do not lie—and right now, the numbers are telling me that the stock market has plenty of upside potential and fundamentally superior stocks will lead the market higher in the second half.
Overall estimates still call for third-quarter earnings growth of 5.8% and fourth-quarter earnings growth of 6.1%. And for calendar year 2022, the S&P 500 is expected to average 8.9% earnings growth. So, earnings momentum continues—just not in all industries and sectors.
That’s why here at Navellier & Associates, we believe in the power of a well-balanced portfolio.
It can literally neutralize the stock market’s uncertainty and take advantage of unique growth opportunities the market throws our way. That’s why we encourage our clients to take a diversified approach to managing their investments—one that can include growth, income, and capital preservation strategies.
These portfolios feature companies that are committed to growing their sales and earnings. Our growth portfolios are segmented by market capitalization, are actively managed, and seek inefficiently priced growth stocks with opportunities for long-term price appreciation. We screen for small- and large-cap companies that are consistently growing sales and earnings. Our team actively manages this portfolio to find undervalued growth stocks.
These offerings provide dividend growth and income opportunities with capital appreciation. At Navellier, our dividend and income portfolios strive for portfolio growth through securities with capital appreciation, strong dividend growth, and income opportunities. We seek out companies that have a history of growing and paying dividends. Most, importantly, these dividend-paying companies have free cash flow to cover each dividend payment. This can it make it much easier to have reliable income in retirement.
Capital Preservation/Defensive Portfolios
These portfolios aim to outperform in up markets and limit losses in declining markets by moving to cash or bonds. This asset allocation plan allows investors to play defense in a declining market. Our capital preservation strategies can help you mitigate steep market losses with defensive ETFs and covered calls. Defensive ETFs can serve this need as they shift to cash or bonds when conditions permit.
When you add up everything we have discussed today, you can quickly see the importance of having a diversified approach to managing your investments—one that can include growth, income, and capital preservation strategies. The power of a well-balanced portfolio cannot be overstated.
When you dive deeper into the details of our exclusive portfolios and strategies, you will see that many of them cross boundaries and can be combined to form an overall portfolio strategy. That portfolio can then be customized to your personal financial goals and risk tolerance.
To build a personal portfolio that strives to deliver returns, it is important to think about things such as your retirement goals, how long you have to reach those goals, and what your risk tolerance is … just to name a few.
At Navellier & Associates, our team is here for you. We will work with you to answer these questions and discuss a customized solution tailored specifically towards you and your retirement goals.
Right now, we have a bullish outlook for the second half of 2022. As we just discussed, history is pointing to higher stocks prices by yearend, but the stock market will narrow as investors grow more selective and focus on stocks with accelerating earnings momentum. We’ve already seen this start to play out, as investors poured into stocks that crushed analysts’ second-quarter earnings estimates and provided positive guidance for the rest of the year.
We can help you build a personal portfolio in the second half. In fact, here’s a sneak peek at how we select stocks for each of our custom portfolio offerings…
Our Proprietary 3-Step Stock Selection Process
At Navellier & Associates, our system was built to find inefficiency in the market, uncover what we think are the market’s best growth stocks, and utilize a disciplined quantitative and fundamental analysis system to create a customized portfolio for individual investors.
Consider an example of the three-step proprietary stock-selection process that we utilize for most portfolios:
- Quantitative Analysis: Using our proprietary screening process, we measure reward (alpha) and risk (standard deviation) indicators to the appropriate market capitalization range for each portfolio. We rank stocks based on the reward/risk measure and reduce the initial investment universe to a select bucket of stocks that fall into the upper percentiles of the reward/risk measure.
- Fundamental Analysis: We then apply fundamental variable screens to the stocks with the highest reward/risk measures. This shines the spotlight on which companies have exceptional profit margins, excellent earnings growth (and positive earnings surprise potential!) and reasonable price/earnings ratios (based on expected future earnings).
- Securities Optimization: We use a proprietary optimization model to maximize alpha, while minimizing portfolio standard deviation. This can efficiently allocate the stocks and create portfolios that are well diversified across sectors and industries.
Primarily, our goal with the three-step stock selection process is to develop portfolios that have a low correlation to their benchmarks, increasing diversification, decreasing risk, and maximizing profits for investors like you.
We’re already over halfway through 2022—and the first six months of the year were tough ones for most investors. But the final months of the year should shape up to be a great ones for all of us here at Navellier. The stock market is narrowing, investors are growing more selective, and growth stocks are returning to favor. So, we believe that now could be a good time for you to have a custom investment strategy that focuses on your financial goals and risk tolerance, as well as diversification.
Navellier & Associates can help you build your own customized portfolio strategy. We rely on our extensive research, trend analysis, customized strategies, and historic market knowledge to manage our client-only portfolios and help our clients take advantage of opportunities that are presented by market corrections—short and long-term—as well as raging bull market situations.
Our proprietary models are built to work on U.S.-based portfolios with a minimum account value of $250,000. If your portfolio meets these criteria, please contact my Navellier & Associates team. They are standing by ready to discuss your personal portfolio and investment strategy to help you make the most of 2022.
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The first step is contacting us to set up a no-obligation portfolio review. This is our opportunity to get to know you a bit more. And don’t worry, there is not a charge for this portfolio review. If you decide you would like Navellier & Associates to manage your portfolio—or one aspect of your portfolio—we will discuss any management fees for that service.
If you decide you’d like to continue to manage things yourself, we hope that we gave you some important information to consider during your portfolio review.
We are not here to simply preach to you, but rather share information that we have gained from our extensive market research and analysis. We also want to know about you so that we can make the right suggestions for your personal situation.
Fill out the form below now to schedule your no-obligation portfolio review.
I’m confident that Navellier & Associates can help guide you to build a portfolio to navigate the current environment and help you achieve your individual financial goals in the second half of 2022.
All the best to you and yours,
Chief Investment Officer
Navellier & Associates, Inc. Private Client Group