Mike’s note: You likely noticed that this morning’s Market Minute seemed a bit off…
That’s because we made the unfortunate mistake of publishing an older essay, from this time last year, in error.
While Jeff does say we’re facing an eerily similar situation in gold stocks today… this morning’s issue was not the intended one. The correct essay is published below. We hope you enjoy, and apologize for any confusion or inconvenience.
Early in September, we got our first real glimpse at how the next bear market will play out.
The S&P 500 lost about 25 points in one day. Wall Street’s favorite momentum stocks led the way lower. Amazon (AMZN) lost nearly 2%. Beyond Meat (BYND) was trimmed by $13. Trade Desk (TTD) dropped about $30 per share.
Investors dumped their growth stocks faster than the Patriots dumped Antonio Brown.
And, while they were selling growth, investors were buying value. The worst performing stocks of 2019 all of a sudden started to rally.
Shares of Halliburton (HAL), which were down 30% for the year, gained 5% in one day. Macy’s (M), which had lost 40% in 2019, jumped 6%. And Teva Pharmaceuticals (TEVA), which had fallen more than 60% this year, rallied more than 7%… on a day when most of the stock market was getting crushed.
A similar scenario played out one week later. The broad stock market traded sharply lower. Growth stocks suffered most of the selling. And money flowed into the “value” stocks that have underperformed all year.
That’s what the next bear market will look like. Money will flow out of the best performing stocks of the past few years, and it will flow into the worst performers. It will be a “rotational bear market” – where growth stocks will fall and value stocks will rise.
Understand… while the major stock market indexes have enjoyed a decade-long bull market run, many individual stocks have already suffered horrendous bear markets. Many of these “value” stocks have already exhausted the sellers – meaning that anyone looking to protect a profit or limit a loss has already sold. They’re not so vulnerable to a swipe of the bear claw – because they’ve already been beaten down.
The stocks that will suffer the most damage in the coming bear market are Wall Street’s high-flying, momentum stocks. The stocks with no earnings, that trade at 10, 15, even 20 times revenue. The stocks investors have been willing to buy at any price over the past year because… well… that’s been what has worked.
But when it stops working – and it will, suddenly, and sooner than most folks are probably prepared for – those momentum stocks will get crushed. And, all of that money will find its way into the old-fashioned stocks that have been around forever, that pay solid dividends, and trade at ridiculously low price-to-earnings ratios.
Best regards and good trading,
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Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].
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