Should You Get Your Hopes Up?

From Baltimore – July was a banner month for stocks after we saw sharp declines in the first half of the year.

And now many investors are anticipating a follow-up performance in August…

 

But is this rally likely to continue, or could it soon fizzle out?

You might as well flip a coin to get your answer.

The truth is that timing the market’s tops and bottoms is nearly impossible. (For more on that, Chief Investment Strategist Alexander Green is writing an entire series on the topic. You can find Part I of the series here.) If forecasting were a perfect science, asset prices would rarely exhibit volatility (and time-tested strategies like dollar-cost averaging would be wholly unnecessary).

It’s why I’ve emphasized buying into a market like this instead of fleeing in fear. It will allow you to maximize long-term returns on high-quality stocks that are now trading for pennies on the dollar.

In fact, right at the end of June, I presented some examples of the kind of stocks I had in mind, which were then trading between 50% and 80% below their 52-week highs.

These were companies with strong revenue growth over the preceding five years that had been brutally beaten down alongside their peers in the market.

I’d like to review their performance since publishing that piece…

From the end of June to now, the S&P 500 has climbed about 9.4%. In contrast, the above “deep-value” tech stocks have soared an average of 24.6% over the same period – more than double the performance of the broader market.

Even compared with a tech-heavy benchmark like the Nasdaq Composite, which gained 14.7% over that period, these plays have significantly outperformed.

Of course, I’m not here to boast about my stock picking. The larger point I’m making is that value continues to play an important role in today’s market.

It’s not about buying stocks because they’re cheap. It’s about buying quality stocks because they’re undervalued. And that’s a very important distinction to make, because in the long run, such stocks tend to outperform.

But the current uptrend is still fresh. There’s no guarantee that this rally, along with the gains in these plays, won’t reverse course soon enough.

If they do, though, I’m not worried. It’ll just present another opportunity to buy into the same quality stocks. Again, my goal isn’t to profit on short-term moves in prices. (I’ll leave that to much better traders than myself.) Instead, my focus remains on the long term.

So whether the bulls keep a tight grip on the reins or the bears end up back in control of this market, my strategy remains the same.

How about you? Has the recent rally in stocks caused you to change your approach in this market? Let us know in our mailbag.

Invest wisely,

Anthony