What to Do When the Only Direction Is Up

Tapering asset purchases... Supply-chain constraints are easing... What to do when the only direction is up... The world's most important personnel decision looms... Earnings are up 39%... Last chance for a great offer on Matt McCall's MegaTrend Investor...

Perhaps everything is going to be OK after all...

Inflation is still real but possibly slowing... And global supply-chain problems continue but have shown signs of easing.

Plus, judging from the stock market, things have never been better. The benchmark S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite Index all closed at all-time highs both Friday and today.

As I (Kim Iskyan) will explain in today's Digest, "up" looks like the path of least resistance for stocks, at least for now. That's true despite continued concerns on the inflation front... rising interest rates elsewhere in the world... uncertainty about who will head the Federal Reserve... and of course, the warnings about the state of the market from my colleague Dan Ferris.

Last week, the Federal Reserve had some good news for investors...

In remarks on Wednesday, Federal Reserve Chair Jerome Powell said that the Fed would begin to slowly unwind its $120 billion-per-month purchases of Treasury bonds and mortgage bond securities. This program – which is a backdoor way of providing liquidity to the U.S. economy – has been a centerpiece of the Fed's COVID-19 economic stimulus effort.

And even if it feels like the pandemic in the U.S. is mostly over... to the Fed, it's not. Powell announced that it would reduce its monthly purchases by $15 billion. That was viewed as good news, because that's a slow rollback that's less than the $30 billion that markets had feared. The Fed will continue to buy bonds until July.

A faster tapering would more quickly reduce the easy money that has been flowing into the economy... and into stocks. It would also have meant that the Fed would be more likely to hike interest rates – sooner rather than later – which would act as a break on economic growth and, indirectly, markets.

As Scott Garliss and our Stansberry Newswire team explained...

[Powell] said [the] announcement is not a direct reflection of the Fed's interest-rate policy. He noted the standard for raising rates is different than for bond tapering. Powell stated the economy will have to meet more stringent tests before interest rates go higher.

Fewer supply-chain constraints are reducing inflation pressures...

The Fed previously said that it would maintain interest rates at current near-zero levels until inflation averages 2% over an extended period, and the American economy achieves "maximum employment."

Right now, inflation is well above the Fed's targeted level. And that has created pressure on the central bank to hike interest rates... in part because higher interest rates would help lead to slower economic growth – and, thus, less upward pressure on prices. Fresh inflation data (to be released on Tuesday and Wednesday) will be an important signpost on the direction of inflation.

As we have written about before, supply-chain bottlenecks and other pandemic-related challenges have hit the supply of goods. Meanwhile, pandemic-delayed consumption ‒ of everything from rental cars to fridges to trips to Arby's ‒ and COVID-19 stimulus have pushed up demand.

The combination of lower supply and heightened demand has been a double whammy... boosting inflation to 5.4% at the end of September.

But there have been some signs that supply-chain problems are easing. In recent days, the Newswire team reported that Ford Motor (F), General Motors (GM), Volkswagen (VWAGY), and Toyota Motor (TM) have said that they expect semiconductor supplies to increase – their scarcity has been a key bottleneck in automotive production.

Scott explains...

If there's a turnaround, the auto companies will be the first to tell us...

And they seem to be telling us that that's good for lower inflation... and it also bodes well for a busy holiday-buying season that would otherwise suffer if there's a continued semiconductor shortage that leads to a dearth of goods that require chips, which is everything from iPhones to PlayStations.

Employment levels remain well below 'maximum' levels...

On Friday, a monthly release on jobs data showed a higher-than-expected number of new jobs in October, as the unemployment rate fell to a post-pandemic low of 4.6%.

As we wrote last week, too many open jobs and too few people willing to take them has been the Rubik's Cube of the post-pandemic employment market... And the concern is that employers – from Amazon (AMZN) to United Parcel Service (UPS) to Domino's Pizza (DPZ) – who are desperate to get workers to fill jobs might be forced to hike wages even more than they have already.

That could further boost inflation and hit earnings due to higher labor costs. Of course, there is the alternative – that earnings and economic growth suffer as consumption is crippled by a lack of workers to produce the goods and services for consumers.

A timetable for tapering could signal the end of an epic bull market for bonds...

Bond prices rise as yields fall... and the yields of most developed-country government bonds have been declining for the past 40 years. For example, since peaking in 1981 at around 16%, the 10-year U.S. Treasury has steadily declined ever since, to a pandemic low of 0.5%. Although there has been volatility along the way, investors with a long-term outlook have seen a big payoff on this mostly one-way bet on bonds.

The Fed's announcement about scaling back on its bond buyback program will reduce its role in the market. The Financial Times warns that the beginning of the end of the unusual monetary policy of the past many years might mean that rally in government bonds may finally be coming to a close...

Predictions of a reversal in [the] trend [of lower bond yields] have frequently come to naught — investors have periodically asked how interest can possibly go lower, only for rates to plumb new depths. Yet this time the multi-decade investment trend may really, finally, be coming to an end.

Meanwhile, the Bank of Korea has already raised interest rates by 0.25% and is expected to do it again before this year is over. The central banks of Australia, Norway, New Zealand, and Canada have all started cutting pandemic monetary stimulus... And central banks in a range of emerging markets, from Russia and Poland to Brazil and South Africa, have either begun to hike interest rates, or indicated that they would soon.

A return to somewhat more "normal" bond yields, in time, would (all else equal) be good news for investors in search of income – who have had a difficult time finding it in the bond market, because yields have been so low, for so long... Higher bond yields, though, may be bad news for stock markets, since risk-averse investors may move into safer bonds at the expense of higher-risk stocks. And higher bond yields would make debt more expensive, which could have big implications for other parts of the economy.

And keep in mind that one of the world economy's most important personnel decisions looms...

The U.S. is the world's biggest economy... and though the U.S. dollar's reign as the predominant currency will eventually come to an end, for now the dollar is still king.

So that means that the person who heads up the U.S. Federal Reserve – a position that's appointed by the president once every four years and confirmed by the U.S. Senate – has enormous influence over the trajectory of the global economy. Current Fed Chair Powell was appointed by President Donald Trump, and is due for renomination – or replacement – in February.

We recently reported on a stock scandal at the Fed that resulted in the resignation of two senior Fed officials – hurting Powell's credibility as the Fed's head. Powell has also come under continued attack from Democratic Senators Sherrod Brown of Ohio, who chairs the Senate Banking Committee... and Elizabeth Warren of Massachusetts, who sits on that powerful banking committee, as well as other progressives in Congress for what they view as the Fed chair's poor track record on banking-sector regulation.

Late last week, Powell paid a visit to President Joe Biden at the White House, according to press reports. Biden also met with Lael Brainard, a long-time Fed insider who's widely considered Powell's main competition.

Brainard wins points with progressives for her more aggressive stance toward banking-sector regulation. With her as the Fed chair, the financial-services sector could come under regulatory pressure. Also, Brainard is more inclined to further ease monetary policy than Powell. So the risk of inflation, with even more loose monetary policy, would likely rise with Brainard.

Nevertheless, the path of least resistance for stocks is still up...

To be clear, the Fed still pours tens of billions of dollars into the economy every month – and that will continue into the future... That's going to help stocks. As we mentioned earlier, signs that supply-chain problems are easing will reduce inflationary pressure, which is another tailwind for markets.

Of course, you can't forget about fundamentals. Corporate earnings have been strong. As of Friday, companies in the S&P 500 had reported average earnings growth in the third quarter of 39.1% over the same period last year... though 2020's third quarter is a relatively "easy comp" since things were still sluggish as a result of the pandemic. That's still a big jump. And it's a lot stronger than the forecast earnings growth of 27.5%.

And that addresses one of the biggest concerns about markets today: high valuations, with the S&P 500 trading at a price-to-earnings (P/E) ratio of around 30. Of course, when earnings grow, valuations decline.

Also supporting earnings are continued stock buybacks, when a company buys its own shares. According to data from the Financial Times, with two months remaining, 2021 is already a record year for share buybacks.

These are heavily concentrated in the market's biggest stocks – like Apple's (AAPL) $90-billion-share buyback program, $60 billion by Microsoft (MSFT), and Alphabet (GOOGL) and Meta Platforms (FB) at $50 billion each. But they still boost the index overall.

Buybacks have the effect of boosting demand for shares – because, essentially, the companies are taking shares out of the market – thus supporting the share price.

What's more... history is on the side of shares continuing to rise through the end of the year. According to data from Goldman Sachs, since 1928 there are 15 instances when the S&P 500 has been up at least 20% through the end of October (so far this year, it's up 27%). And for the remainder of those years, the median return was more than 5%, 80% of the time.

And it's only the beginning, says Matt McCall...

Stansberry Research's newest senior analyst launched his research service the MegaTrend Investor last month with a portfolio of 15 stocks.

Matt says the convergence of new technologies over the next 10 years will make what he calls the "Roaring 2020s" the stock market's greatest decade.

These technologies started like every other next-generation technology... quietly and with little understanding, acceptance, or adoption. But now, after years of slow incremental growth, they are starting to enter the liftoff phase – when adoption and evolution will accelerate at exponential rates.

Think of electric vehicles, self-driving cars, telemedicine, the Internet of Things... and many more. According to Matt, at the end of this decade our lives will be very different than they are right now... Just like if you look back 20 years ‒ the Internet was in its infancy, there were not yet smartphones, and companies like Google and Amazon were just getting started.

Matt says...

In a few years' time, you'll be able to do all sorts of things never before imagined. We'll have flying cars and life-saving, non-invasive medical procedures. You'll be able to sit courtside at an NBA game without ever leaving your home. Your wearable devices will be able to share your health data with your doctor... in real time.

I'm not exaggerating when I say that every single industry on Earth is going to be reimagined…

And the investment implications will be massive.

But just because these technological innovations will touch every corner of the world doesn't mean you can throw your money at just any industry... any technology... or any company. You have to invest in the technologies and companies that are leading the change.

Tomorrow at midnight, Stansberry Research is closing down the Charter Membership offer for Matt McCall's MegaTrend Investor. The portfolio is already off to a fantastic start... up almost eight times the S&P 500 in two weeks. And as we said, Matt believes this is only just the beginning of a massive long-term trend. We encourage you to take a closer look now, while you can still receive more than $10,000 in free research and bonuses by getting started today.

New 52-week highs (as of 11/5/21): Analog Devices (ADI), Automatic Data Processing (ADP), Applied Materials (AMAT), Atkore (ATKR), Best Buy (BBY), Bunge (BG), CBRE Group (CBRE), Richemont (CFRUY), Cintas (CTAS), Comfort Systems USA (FIX), Freehold Royalties (FRU.TO), Formula One Group (FWONA), Alphabet (GOOGL), Ingersoll Rand (IR), James Hardie Industries (JHX), Liberty SiriusXM (LSXMA), McDonald's (MCD), MYR Group (MYRG), Invesco S&P 500 BuyWrite Fund (PBP), Procter & Gamble (PG), ProShares Ultra QQQ Fund (QLD), Construction Partners (ROAD), ProShares Ultra Technology Fund (ROM), The Shyft Group (SHYF), ProShares Ultra S&P 500 Fund (SSO), Trex (TREX), AMERCO (UHAL), United Rentals (URI), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Russell 2000 Fund (UWM), Vanguard S&P 500 Fund (VOO), Consumer Staples Select Sector SPDR Fund (XLP), and Zebra Technologies (ZBRA).

Over the weekend, we received a lot of responses to last Friday's Digest from our colleague Dan Ferris. We're sharing some of them in today's mailbag. As always, you can share your thoughts, comments, and observations on the markets with us at feedback@stansberryresearch.com.

"Dan, over the years I have read a lot of what you have written. Maybe my first stuff was in 2009. I guess that is forever ago. Just thinking about it now, it has been a long time.

"This [Digest] that you wrote is one that really hit home for me. Over the years I have become an options trader and certainly have a variety of other investments. It covered my area of expertise with a view of what I do in a way that I have never looked at it.

"I want to thank you for all of the years you have given me and your other readers." – Stansberry Alliance member Jeff S.

"Dan, all you so eloquently describe could have been written in 1972, albeit without the esoteric financial products.

"Meme speculating was in precious metal miners and all commodities. Outside the financial markets in real estate, works of art, wine, watches, any hard asset.

"The disaster that followed was a nightmare with portfolios and pensions decimated. Your permanent stance is very refreshing and valuable. Regards." – Paid-up subscriber Colin S.

"A fantastic but true story of the fantasies running around town these days.

"I love the comparison with the circus, which also has so many acts for you to admire and support. You can enjoy what you like, be it beauty, excitement, danger and even fear.

"Pop-up surprises? The lady about to have swords thrown at her? The impossible aerial troupe ready to fall? And when the show is over, you may notice the smell of offal from the elephants." – Paid-up subscriber Margaret H.

"My thanks to Dan for a great article.

"In regard to the list of 52-week highs, would it be appropriate to say that if I own a stock on the list, I'm happy. If I don't own it, now might not be the time to buy." – Paid-up subscriber Jerry S.

Dean Jones Jr. comment: First of all, Jerry, thank you for writing in and praising Dan's recent Digest. We're always glad that he's a part of our staff.

Now, as for the rest of your e-mail... The simple answer is "not exactly."

You're correct on the first part. If you own a stock on the list of 52-week highs in the Digest, you're likely pretty happy with your investment (at least if you bought before it started hitting these new highs).

But just because a stock is on the list doesn't necessarily mean it's not time to buy...

A variety of factors go into each investment – including current valuation, growth potential, and more. The analysts and editors who make these recommendations in their respective publications look into all sorts of conditions on whether a stock remains a "buy" or not. And as needed, they pass along adjusted instructions to their subscribers.

In short, you should consider the list of 52-week highs as a basic guide... It's merely a way for us to show Digest readers which stocks are doing well within our Stansberry Research universe. But for specific details on whether a stock is still considered a buy or not, you'll need to check out the publications in which these recommendations were made.

I hope this explanation helps. Thanks again for the feedback.

"Thank for the call option/short squeeze explanation of Tesla's rising share price. Personally, I could never understand it – [and thought] maybe tribalism. But your explanation makes perfect common sense. Thanks." – Paid-up subscriber Tim B.

Regards,

Kim Iskyan
Ashton, Maryland
November 8, 2021