A new exciting bull stock ‘market’ is coming

Today’s many uncertainties and risks cloud hope and optimism. However, it is from such times that equity investment opportunities arise. Those dark clouds have two silver linings creating a new bull stock market:

• First, the fad-based speculation with easy money is wiped out, bringing risk return expectations and stock valuations back to reasonable
• Second, experienced and professional stock market investors, with an attitude of “out with the old, in with the new”, are now focusing on new ideas and strategies

Enter the new bull market “market”

“Market” is in quotes because what is emerging appears to be a more common “special situations” uptrend. If so, the stock market indices will not capture the action. As has happened in the past, index returns will be affected by underperformance by large companies, making the new bull trend even more exciting.

But isn’t inflation a problem?

Not necessary.

The Federal Reserve’s low interest and easy money policies from 2008 to 2021 created an environment where large growth companies and large asset funds thrived. Much of the easy money went into wealth accumulation, keeping consumer price inflation in check.

But then the Covid-induced shutdown hit and the Fed and US government threw $ trillions into the economic hole. That created an environment where too much money was floating around, much of it in the hands of consumers. So eventually inflation came into the mix, distorting the beliefs formed in the previous years.

The reason that today’s higher inflation isn’t necessarily bad for the stock market is that stock prices are based on current dollars, as are company revenues and profits. If a company can counteract or control some or all of its cost inflation, it can generate higher growth, which in turn can lead to rising share prices.

Examples: The inflation run-up period of 1966-1982 had strong stock market periods

Note: I started investing in stocks in 1964

The previous bull market leaders through 1965 were the big, established corporate stocks that took the Dow Jones Industrial Average (DJIA) to new highs. (The DJIA was the primary stock index at the time.)

After the economic slowdown of 1966 came the “go-go” stock market years, 1967-1969, with tumultuous returns for speculative and special situation stocks. The DJIA significantly underperformed the returns of those new leading stocks.

After the moderate recession of 1970 came the nifty-fifty market of 1971-1972, in which the shares of the largest and best growth companies were driven to high valuations.

After the crushing recession of 1973-1974 and a stock market fall of nearly 50%, the eventual recovery excluded those big growth stocks. Instead, investors turned to small company stocks. As inflation rose and the economy faltered, the focus was on companies that beat inflation, such as natural resource stocks, particularly oil. (The S&P 500 allocation to oil stocks rose more than 20%.)

So the stock market and experienced/professional stock investors never say dead. They just adapt. And that looks like where we are right now.

The bottom line is, what are the company stocks that will drive the new market trend?

They have just begun to show themselves. From zero in January (and many months before that), my list has grown to five “confirmed” stocks and four “probable” stocks. I have yet to buy them, at that time I will write about them.

The nine are small to medium sized companies, are in various industries and none in the S&P 500. Those characteristics are clearly the opposite of the large, technology, S&P 500 leaders that drove the previous bull market.

Importantly, that’s a good thing because it means there’s a lot of potential investor movement from lagging index funds (including exchange-traded funds) that could push up a new breed of favorite. The shift has always happened before, so expect it to return again.