A New, Exciting Bull Stock ‘Market’ Is Emerging

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

• First, the fad-based and easy-money speculation is washed out, making risk-return expectations and stock valuations reasonable again
• Second, experienced and professional stock market investors, adopting an “out with the old, in with the new” attitude, now focus on fresh ideas and strategies

Enter the new bull stock “market”

“Market” is in quotes because what is emerging looks to be a more common “special situations” uptrend. If so, the stock market indexes will not capture the action. As has happened in the past, the index returns will be mired down by big company underperformance, making the new bull trend even more exciting.

But isn’t inflation a problem?

Not necessarily.

The Federal Reserve’s low interest rate, easy money policy from 2008 to 2021 created an environment in which big growth companies and big asset funds prospered. Much of the easy money went into asset accumulation, thereby keeping consumer price inflation in check.

But then the Covid-caused shutdown hit, and the Fed and U.S. Government threw $trillions into the economic hole. That produced an environment with too much money floating about, much of it in the hands of consumers. So, inflation finally jumped into the mix, upsetting the beliefs formed in the earlier years.

The reason today’s higher inflation is not necessarily bad for the stock market is that stock prices are based on current dollars, as are company revenues and earnings. If a company can counter or control some or all of its cost inflation, it can produce higher growth, which, in turn, can produce stock uptrends.

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

Note: I began stock investing in 1964

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

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

After the moderate 1970 recession came the 1971-1972 “nifty-fifty” market, in which the biggest and best growth company stocks were driven to high valuations.

After the crushing 1973-1974 recession and near-50% stock market fall, the eventual rebound excluded those big growth stocks. Instead, investors turned to small company stocks. Then, as the inflation rate rose higher and the economy waffled, the focus was on inflation-beating companies like the natural resource stocks, particularly the oils. (The S&P 500 allocation to oil stocks rose to more than 20%.)

So, the stock market and experienced/professional stock investors never say die. They simply adjust. And that looks like where we are now.

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

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

The nine are small- to mid-sized, are in diverse industries, and none are 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 is a lot of potential investor movement from lagging index funds (including exchange-traded funds) that could drive up a new breed of favorites. The shift has always happened before, so expect it to return again.