On Wednesday at the Dow vs. Bitcoin: The Race to 40K debate, I’m sure my colleague Matt McCall will make a strong case for cryptocurrency investing. I’ve gotten a peek at his research myself. But I can already tell you: There’s every reason to expect the Dow stocks to win the Race to 40K. In fact, I can give you five reasons here today!
The first one is very simple…
1. Our market is an oasis for the world.
This is a point I’ve made many, many times in the last few years. And that’s still the case even during the COVID-19 pandemic.
For example, our GDP report may have rattled a lot of people, but it was better than expected. It was certainly better than Germany’s; Germany’s contracted even more, when you annualize it. (The European numbers are quarter by quarter; our numbers are annualized.)
True, we’re likely looking at a U-shaped recovery, not the V-shaped recovery we’d all hoped for. I’ve been very honest about that. And that’s largely because of the employment situation. But help is on the way, with the Trump administration throwing lots of money for domestic manufacturing of COVID-19 vaccines in this “Operation Warp Speed.”
2. Interest rates are incredibly low.
I touched on the interest rate environment on Thursday and how when the Federal Reserve is keeping bond yields next to nothing, stocks become much more valuable.
Now here’s another effect: Companies can go out and refinance their debt at ultra-low rates. That certainly includes the big Dow companies, like AT&T (T). So that’s going to help their cash flow, their earnings, their bottom line. That, in turn, should boost their share prices.
And these Fed policies also have yet another effect…
3. The U.S. dollar is having a really bad month.
You might think, “The dollar is weak? That’s horrible!” Well, not really. Ironically, a weak dollar is good for multinationals, and half the S&P 500 companies’ sales are outside America…which means it’s paid in foreign currencies. If those get stronger against the dollar, that’s actually more money for many of our companies.
4. Trading volume has been light on the downside.
All this is not to say that our stocks will go nowhere but up. Their recovery hit the brakes last week, in fact. But the key with any sell-off is the volume. As long as trading volume is light and there’s no panic selling, we’re okay.
So, don’t worry about the gyrations; take advantage of them with stocks like the free pick I’ll be giving away at Wednesday’s Race to 40K debate. As long as the trading volume remains light, there’s nothing to be too concerned about.
Also, it’s important to keep in mind that August is a seasonally weak month. The reality is that the market is plagued by with low trading volume given that Wall Street and Europe are on extended summer vacations.
This opens the door for unscrupulous short traders and scam artists who try to manipulate stocks with false rumors and bogus reports.
But perhaps people aren’t as enthusiastic sellers lately because they’ve noticed the same thing I have…
5. This earnings season has been stunning.
I always watch corporate earnings very closely. And the magnitude of the earnings surprises, even the sales surprises have been nothing less than incredible.
Some bad earnings will come out later, and good earnings tend to come out early; that’s just normal for the market. But by and large, I’m very, very pleased!
Let’s just look at the “FAANG” stocks as a quick example. Here’s how their revenue and earnings numbers rang up:
Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) all beat analyst expectations on their second-quarter revenues. The first four turned in double-digit sales growth (while Google was down slightly).
And most of the FAANG companies beat handily on earnings, too…especially Amazon. While Wall Street expected more like $1.65, Amazon ended up turning in $10.30 per share! That was nearly double the year-ago figure. (Remember, company management initially guided to a second-quarter operating earnings loss , as they planned to spend at least $4 billion to adjust to the coronavirus pandemic.) Netflix, too, ended up doubling EPS, year-over-year.
As I’ve made clear to readers like you, technology is what is getting a lot of us through these tough times… whether it’s communicating online, shopping online, or getting entertainment online.
Technology is also Matt’s basis for saying bitcoin will win The Race to 40K.But the proof we’re seeing NOW is coming from the publicly traded companies.
It’s certainly being reflected in these earnings announcements from Big Tech. Despite the sharpest economic crash in decades, all the FAANG companies were profitable in the second quarter – some far more than the analyst community expected!
And if, in the second quarter, other companies miss their estimates…well then, the money just get reshuffled to other stocks for the reasons I mentioned above. (Since I only recommend the highest quality companies as per my Portfolio Grader scans, that money’s going to come our way!)
Now how about the future? Well, that’s just as uncertain for our biggest companies as it is for anyone else…
- Facebook is currently dealing with a boycott triggered by some of the hateful, violent and misleading content that’s popped up on its platform. Microsoft (MSFT), Coca-Cola (KO) and Ford Motor (F) are some of the companies to have pulled ads from Facebook. Smaller companies may have to pull back on ads, too, simply because of the COVID-19 impact.
- Apple’s sales are getting a bump from stimulus check spending, a phenomenon that won’t last forever. Even so, in the last quarter, iPhone sales were down slightly (though services, iPad and Mac sales all increased nicely), and Apple has been forced to delay the new iPhone by “a few weeks.”
- Amazon has already forecasted that its revenues will ease off the gas a bit in the third quarter, with 24% to 33% growth…though it did not provide earnings guidance.
- Google also foregoes earnings guidance. And of all the FAANGs, it might have the most exposure to the economic standstill – as it makes more than three-quarters of its money from advertising. And ads for things like travel deals are not big business right now.
- Netflix doesn’t expect its luck to last, either: “In Q1 and Q2, we saw significant pull-forward of our underlying adoption leading to huge growth in the first half of this year…we expect less growth for the second half of 2020 compared to the prior year,” as per the earnings announcement.
I don’t say this to cast any doubt on the market as a whole; far from it! I simply want you know that there may be better specific buys for you right now. Ones that offer exposure to powerful long-term trends.
To that end, I’ll be sharing one of my favorite Breakthrough Stocks with attendees of Wednesday’s Race to 40Kevent. We’ve set up an exclusive website with resources you may want to peruse prior to our debate.
And we’ve already gotten your RSVP, so thank you for raising your hand to attend Wednesday’s event. I look forward to seeing you there!