A new, exciting bull stock market is about to emerge

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

• First, the fad-based and facile speculation is washed out, which in turn makes risk-return expectations and stock valuations reasonable.
• Second, experienced and professional stock market investors, adopting an “out with the old, in with the new” attitude, are now focusing on new ideas and strategies

Enter the new bull stock market

“Market” is in quotes because what is emerging appears to be a more common “special situation” uptrend. In that case, the stock market indices will not capture the action. As has happened in the past, index returns will be hammered by large-cap underperformance, making the new bull trend even more exciting.

But isn’t inflation a problem?

Not necessarily.

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

But then the Covid-caused shutdown hit, and the Fed and the US government threw trillions of dollars into the financial hole. It created an environment with too much money floating around, much of it in the hands of consumers. So inflation eventually jumped into the mix, upsetting the beliefs formed in the earlier years.

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

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

Note: I started investing in stocks in 1964

The previous 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 economic downturn of 1966 came the “go-go” stock market years, 1967-1969, with heady returns for speculative and distressed stocks. The DJIA lagged significantly behind the returns of the new leading stocks.

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

After the crushing recession of 1973-1974 and the nearly 50% stock market decline, the eventual recovery excluded these large growth stocks. Instead, investors turned to stocks in small companies. As the inflation rate rose higher and the economy weakened, the focus was on inflation-beating companies such as natural resource stocks, particularly oil. (The S&P 500 allocation to oil stocks rose to more than 20%).

So the stock market and experienced/professional stock investors say never 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 are just starting to show. From zero in January (and many months before), my list has grown to five “confirmed” stocks and four “probable” stocks. I have not yet bought, then I will write about them.

The nine are small to mid-caps, are in different industries, and none are in the S&P 500. These characteristics are clearly the opposite of the large-cap, technology, S&P 500 leaders that drove the previous bull market.

Importantly, that’s a good thing because it means there’s a lot of potential investor movement from trailing index funds (including exchange-traded funds) that could fuel a new breed of favorites. The shift has always happened before, so expect it to come back again.

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