The Profit Period: Why the Coming Six Months Could Deliver the Biggest Trading Profits in Years
For any of you news junkies out there, be warned:
When it comes to the mainstream media, you must be careful what you consume…
First, they told us a surefire recession was ahead in 2023. Next, they had us believe unemployment would skyrocket. Even worse, they sold us on tales of a coming economic collapse.
Instead, stocks posted double-digit gains across the board last year, with the S&P 500 surging nearly 25%. And while this year has seen plenty of bumps in the road, it’s nothing like what the “permabears” told us to expect any day now. That economic collapse must be running way behind schedule.
So, always be suspicious of grandiose predictions.
Instead, focus on data, history, and evidence-based analysis. That — not fearmongering — is what will help you navigate any environment.
Great examples include our non-consensus call to buy beaten-down small caps on Oct. 19, 2023. Depressed valuations pointed to a monster bullish setup, which teed up a 20% gain for small caps in about six months.
Another instance was the voice of reason to always to buy in November. History proved that November ignites a ferocious rally, with data going back to the 1980s.
Since that post on Nov. 2, the S&P 500 delivered. Even accounting for April’s brutal correction, the S&P ripped more than 17% higher in six months.
With historical proof offering a guiding light in the past, let’s see what potentially lies ahead for markets in the coming months.
Looking at election years over that same period, the market forecast looks quite sunny over the next six months – particularly if you drill down to historically strong groups of stocks.
The 2024 Election-Year Investing Playbook
Here are a few facts for the S&P 500 during election years back to 1980, including 11 presidential elections:
- The first quarter falls an average of 1.49%, drastically underperforming the average 2.15% first-quarter gain for all years.
- The second quarter kicks off a stronger environment with 3.09% gains, followed by 2.29% rips in the third quarter, and 1.19% jumps in the fourth quarter.
- The average full-year gain for stocks is 5.81%, drastically underperforming the 10.35% market average.
So, take any pullbacks for what they truly are — another great buy-the-dip opportunity.
If you’re sitting on cash patiently waiting for the next great setup, chances are you’ll get one in the weeks ahead.
But you’ve got to prepare now and you can use TradeSmith’s arsenal of analytics to see which areas of the market rank best.
Buy Small Caps When They’re Cheap and On Sale
With small caps already up 20% in about six months – a monster move – you may assume the group can’t possibly rip further. But there’s a case to be made that this unloved area of the market can climb double digits this year.
Let’s start off with the top reason why:
Valuation Gap Between Small-Caps and Large-Caps
The S&P Small Cap 600 offers a dirt-cheap next-12-months P/E of 14.6, compared to the S&P 500’s 21.7 ratio.
Not only does this cheaper valuation make small-cap stocks interesting from a value perspective, they also pack a 30% greater dividend yield vs. larger companies.
The S&P Small Cap 600 is constructed with greater weights in cyclical areas like Financials and Industrials, boosting the dividend yield to 1.87% vs. the S&P 500’s yield of 1.40%:
So far in 2024, we’ve had a ripe pullback and better valuations for small-cap stocks. While these two data points alone would make for a strong case to own the group, there’s more. A lot more.
You see, as we just showed you, pullbacks early in the year are extremely common for stocks.
However, the bounce back is much stronger for small caps than large caps.
Let us prove it.
Small Caps Crush Large Caps in Election Years
Elections bring all kinds of uncertainty to politics. Fresh tax laws and new party leadership are just a couple of considerations that large investors have to juggle.
And when unknowns exist in the stock market, smart traders sell first and ask questions later.
That’s exactly the playbook heading into the vote. There’s a tendency for stocks to struggle earlier in an election year before gathering steam in later months.
BUT small caps, in particular, enjoy a much larger surge in the back half of the year.
Since 1996, the S&P Small Cap 600 tends to slightly underperform the large cap S&P 500 in the first three months of an election year with an average fall of 1.4% (small caps) vs. a drop of 1.3% for larger stocks.
And that’s where the bad news ends. Because after the three-month mark, small caps vault higher.
Election uncertainly is a dip buyer’s friend. Small caps offer an enviable performance of 10% gains in election years… easily trumping the measly 5.8% typical gains in large caps:
As you build your election-year buy list, make sure to add a few smaller stocks to the mix. Lower valuations and fatter yields give this unloved group higher grades in 2024.
That’s where you should be hunting as an investor… and it’s where TradeSmith shines. You can use our software and analytics to uncover leading stocks poised to thrive in a risk-on tape.
Dips eventually lead to rips – so it’s time to start preparing today.
Top Sectors to Buy
Now, we’ll move to the next step in our election playbook: focusing on which sectors to own. As always, we’ll let historical evidence help cast our vote.
And the results are a wake-up call for those investing like we’re still in last year’s market.
In short, if you think April’s reckoning was a blip and technology and AI stocks are still the only games in town… I’ve got news for you.
There are two sectors you should keep on your investing ballot in 2024. And neither of them are anywhere near tech. In fact, both are set to outperform tech by nearly double.
Remember These Sectors When the Final Fed Hike is In
Since markets bottomed in late October, small caps, large caps, REITs and more have benefited due to one simple theme: the expectation of falling interest rates.
And in the study below, you’ll see how the Financial and Health Care sectors tend to gain the most once the final hike is in — to a tune of 30% and 29%, respectively:
So, as investors, we should stack the odds in our favor when making bets.
And because we’re in an election year, that’s another big reason to expect outperformance from them in 2024.
During election years going back to 1996, the S&P 500 has drastically underperformed its long-term average, with a meager 2.8% return.
This is much less than the typical 10% gain the market has offered annually over decades.
BUT, when you dive below the surface, Health Care and Financials shine brighter than the rest.
When you average out the prior seven election years back to 1996, the Health Care sector gains 7.5% with Financials not far behind, returning 7%:
When you tie this leadership in with our first study, it’s clear these areas should be worth serious consideration this year. We have an election year ahead AND a final Fed rate hike behind us. That’s a double whammy for Financials and Health Care.
Now, 7% gains may not sound like much, until you realize recent election years include the dot-com bust of 2000, Great Recession of 2008, and COVID-19 pandemic crash of 2020… making it all the more impressive.
Combining all these factors, investors should start looking at high-quality, smaller-cap Financial and Health Care stocks to buy ahead of a major surge in the second half of this year.
Why Trading Could Deliver the Best Results of All
In addition to these sectors, trading could also deliver outsized gains during the coming six months.
You can see why on this chart from the second half of 2020.
This is the VIX — the famous market volatility gauge.
It measures the ups and downs of the markets. As you can see, it’s moving all over the place.
This was not an anomaly.
According to the head of the options desk at Piper Sandler and Co., during each of the past four presidential cycles, demand for options has increased.
You can see the same thing happening in 2016. In fact, the chart is remarkably similar to 2020.
A big spike in June, followed by large swings all the way through the election.
Now, for most investors, this is a bad thing. They’re looking at a rollercoaster ride.
But if you’re trading, it’s great.
All that speculative money flooding the market means there are opportunities for extra-large payouts.
We conducted a backtest on payouts during the last two election seasons.
Even if you just traded big companies like Google, Amazon, and even Blackrock, you could have seen huge payouts, like $6,642… $7,388… $8,949… $10,046… even $10,539 — during both election cycles.
Now, these are just historical examples.
There’s no guarantee anyone could have captured all those gains.
But the point is, it’s a great opportunity for trading.
Plus, this election cycle, we also have the Fed.
Practically every time Fed Chairman Jerome Powell speaks, the market moves.
Now we get to combine that volatility with a whole new batch of volatility from the election.
Between the two, we could be looking at some great payout opportunities — starting very soon.
During The One Percent Event on Wednesday, May 29 at 8 p.m. ET, TradeSmith CEO Keith Kaplan will explain the strategy he’s created to play this.
While nothing is guaranteed, he believes those with large portfolios could potentially see six figures in the coming six to 12 months.
Make sure to tune into the event for all the details.
Regards,
TradeSmith Research Team