When I spotted a report that bacon prices in December had experienced their biggest one-month decline since 2019, it was like the words lit up and then jumped off the page.
You have to understand… I’m a “bacon guy.”
I’m the guy who believes you “fix” a salad by heaping on chunks of crispy bacon… with a generous sprinkle of bacon bits added for good measure.
I’m the guy who — when COVID-19 created supply-chain mayhem — walked past the paper towels and toilet paper everyone else was hoarding, and bought out my local grocer’s entire supply of center-cut bacon.
So that report on falling bacon prices was my personal sign that the inflationary pressures we’ve all been wrestling with are finally easing — like falling home prices, car prices, or gas-pump prices are to everyone else.
I was thinking about this last week after reports surfaced that an “alarming re-acceleration” in a key Federal Reserve inflation gauge had put investors back on their heels.
There you have it: One day things are looking up for stocks, for the financial markets, and for the economy in general; the next, that narrative has experienced a whiplashing reversal — and the uncertainty and worry we seemed to be getting clear of is suddenly back in full force.
This is the “New Normal” we’re facing right now. As investors, we have to account for it — adapt to it — in every way possible: With our expectations, with our emotional responses, with how we manage risk — and even with the investment strategies we embrace.
In short, you can’t let your guard down. Vigilance is crucial. But there are still ways and places to make money.
I don’t want to rain on anybody’s parade, but who knew at the start of 2020 that the aforementioned pandemic would bring the global economy to a grinding halt — let alone shut it down for as long as it did?
Many felt we’d be back to work by that April — at the latest. Remember when we naively believed that “sheltering in place” for two weeks would be enough to get the virus under control?
Let’s look at something more current — the war in Ukraine. Before Feb. 24, 2022, not even a modern-day Nostradamus would’ve predicted that the bloodshed would still be happening a year later (with no end in sight), or that the energy market and pesky global supply chains would still be feeling the pinch.
My point here is that you never really know when the other shoe will drop to obliterate the status quo.
That brings us to a critical question: If we know that uncertainty and disruption truly is that New Normal, what moves can we make for protection — and to put ourselves in the best position to win?
As questions go, it’s a great one. And I’ve got some terrific suggestions — and two stock candidates — to offer as possible answers.
Anything Could Happen
When it comes to a New Normal scenario, anything is possible — which is why “expert” predictions must be viewed skeptically. But there are some scenarios that are more probable than others.
For one thing, one historical “normal” tells us that stocks rarely decline for two years in a row. In fact, stocks have fallen in back-to-back years only three times since 1950. One of those was 50 years ago — during the recession of 1973-74. And it happened twice more in the early 2000s, as a result of the tech-sector crash.
Last year (2022) dealt investors a lot of pain, with the S&P 500 ending the year down about 20%.
With accelerating inflation, spiraling layoffs, rising debt, falling savings with consumers, and resonating recession fears, it’s worth asking if we’re headed for the fourth back-to-back decline in stocks in the last seven decades.
Here’s where you need a reminder: It’s a “market of stocks,” not just “the stock market.”
Out With the Old — And in with Two New Stocks to Watch
The fact is, markets are cyclical. And not just broad market indexes like the S&P 500 or the Dow. Markets are cyclical by sector, too.
In other words, the stocks that made you money last year, or the year before, aren’t necessarily the same ones that’ll put cash in your pocket this time around.
For example, the top stocks in 2021 — Microsoft (MSFT), Alphabet (GOOGL), Apple (AAPL), Nvidia (NVDA), and Tesla (TSLA) — were all in one sector “basket.”
They were all tech stocks.
Techs were the reigning “superstocks,” and these five accounted for 51% of the returns for the last half of that year.
If you tried to keep surfing that same sector wave into 2022, you likely suffered a pretty bad “wipeout.” Tesla, alone, lost 69% last year.
Tech was shoved out of that top spot and a new king was crowned: energy — the biggest winner of 2022. Total gains of the Top Five energy stocks were:
- Occidental Petroleum Corp. (OXY): 119.1%
- Hess Corp. (HES): 94.1%
- Exxon Mobil Corp. (XOM): 87.4%
- Marathon Petroleum Corp. (MPC): 86.6%
- Schlumberger NV (SLB): 81.2%
During a year that saw the S&P 500 stumble 20%, energy stocks delivered an average return of 59%.
Energy is still enjoying success — for now. None of the Top Five performers from last year have stumbled in any significant way since the start of this year.
But in any kind of market — and especially in a New Normal economy — it’s likely just a matter of time. Energy will eventually lose steam, level off, and revert to the mean. Historically, the stocks that lost in one year will outperform the winners the following year.
Emotion often causes investors to overstay their welcome in the stocks that have been winning. And that same emotion keeps those folks from deploying cash into laggards — even those headed for a rebound.
TradeSmith was built around investing software that “systematizes” investing — and, in doing so, helps you avoid the emotional missteps that can cost you dearly.
And I can tell you right now, the “systems” may be identifying a new class of stocks for 2023. If “tech” has had its day, and energy is destined to fade, the next candidate for a sector crown could be biotech/pharmaceutical stocks.
The Health Care Select Sector SPDR Fund (XLV) holds 63 stocks — with 45.16% of those considered healthy by our indicators, and 60.32% rated as “bullish,” meaning we anticipate they will move higher over the next few months.
Two standout health care stocks I’m watching are:
- Sotera Health Co. (SHC): The Ohio-based venture provides sterilization, lab testing, and advisory services to medical-device and pharmaceutical companies. After agreeing to pay off multiple lawsuits related to allegedly harmful factory emissions, Sotera’s stock price virtually doubled in one day. Since the beginning of the year, the share price has climbed 101%.
- And, finally, Scilex Holding Co. (SCLX): The Palo Alto, California-based biotech focuses on non-opioid pain-management products. Scilex is projecting fiscal year 2022 revenue to be as high as $42 million, a year-over-year jump of as much as $11 million. Shares have already moved 81% since the start of 2023. Growth like that is definitely heading in the right direction. It’s got my attention.
There you have it.
We’ve given you new insights on what may come next for stocks.
And we’ve given you two stocks that could add some bacon-like “sizzle” to your portfolio.