After a tough September, U.S. stocks have recovered from the short-lived bout of weakness and are once again trading just below the 52-week and all-time high.
Take a look at the S&P 500 below. The leading index fell about 10% in September but has been quick to rebound and is once again trading just below the 52-week high.
Why Were Stocks so Quick to Recover?
- September is historically the worst month of the year for the stock market. So the pullback looked more like a seasonal pullback as opposed to a market meltdown because of a huge fundamental event such as COVID-19 or a recession.
- Secondly, U.S. stocks do not appear to be overly worried about the U.S. presidential election. We are three weeks away from the election and U.S. stocks are trading just below the 52-week high. This is a clear signal that investors believe that stocks can prosper under Trump or Biden.
- Third, after the hell that has been COVID-19, stocks have been battle tested in 2020. If a global pandemic and quarantine that shuts down huge parts of the global economy can’t knock stocks down, that’s a signal that the stock market is strong.
- Fourth, the U.S stock market is entering the seasonally best time of the year. The six months from November through April is historically an excellent time of the year for stocks.
- And finally, stock market momentum is still higher. Remember, stocks spend a heck of a lot more time going up than going down. That’s why an investors best friend is time – the more time investors are invested in stocks – the higher the probability of success.
What is The Lesson Here?
Short-term volatility is normal in the stock market. Its not any reason to panic. That’s because the stock market is usually very quick to recover. In fact, the stock market has never once in its history of more than 120 years failed to recover from any weakness.
For investors with cash, weakness in the stock market is usually an excellent time to buy. And the deeper the correction, the better. For example, the sell off during COVID-19 turned out to be an incredible time to be buying stocks. And that’s exactly what I was telling my clients at the time.
For example, on March 13, five days before the US stock market finally bottomed out I sent out a newsletter discussing how COVID had impacted stocks and shared guidance on how to proceed.
Looking forward here is the big question – is this the bottom or are stocks headed lower? In the short run I am expecting more volatility and uncertainty. But no matter how coronavirus plays out, in the long run I expect stocks to recover just like they always have – through world wars, depressions, and recessions. US stocks are the most oversold they have been in the last five years. Any time US stocks were this oversold in the last five years – they rebounded and rallied into a new high. The relative strength index measures when a stock is oversold or overbought. The relative strength index on the S&P 500 is the most oversold its been in the last five years. Take a look below.
Here’s a link to the full newsletter update if anyone want to review.
S&P 500 Most Oversold in 5 Years – Time to Buy?
What Should We Expect Moving Forward?
The U.S stock market is moving into its strongest six months of the year – from November through April. I am not expecting huge gains, but I am expecting stocks to continue grinding higher for the rest of the year.
Take a look at this chart from Investopedia.
The Big Picture
The S&P 500 saw a small pullback in September. However stocks were quick to recover and are now moving into the best six months of the year. Momentum is still higher. I am not expecting a big surge into the end of the year, but I am expecting stocks to continue grinding higher for the red of the year.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
