A New Bull Market

Many of you may not believe what I’m about to tell you. I will admit the information that I’m about to reveal could indeed sound ridiculous, the ravings of a mad man. Some might even consider it outright heresy. 

But it is my duty as a faithful Wealth Daily editor to tell you the truth as I understand it. 

And with that, I will tell you: There was a time when the health of the stock market was gauged by more than just a handful of tech stocks. 

In fact, investors used to try to get a handle on increases in manufacturing and shipping to see if demand for actual things (like shoes and dishwashers) was growing. Now, and I know this part may sound really nuts, investors and analysts would actually pay attention to trucking and railroad stocks as a way to measure whether the U.S. economy was growing or shrinking. 

Seems like a lot of work, doesn’t it? It’s so much easier to just pay attention to Apple and Tesla…

OK, OK, enough with the sarcasm. 

The notion that demand for goods and the shipping of goods are a reliable way to look at economic health is a pretty old idea. Charles Dow, the namesake of the Dow indices, was the first to take select stocks from similar industries and group them together in order to provide a quick and easy way to measure those industries.

Mr. Dow went on to theorize that if both the Dow Industrials (the making of stuff) and the Dow Transports (the shipping of stuff) hit new highs at around the same time, well, the U.S. economy was expanding, and owning stocks was a good idea.

Charles Dow’s ideas have become known as Dow Theory. And the reason I bring this up is that both the Dow Transports and the Dow Industrials hit new highs last week, indicating that a new bull market may be at hand.

A New Bull Market 

It might seem crazy to talk about a new bull market after the run that stocks have had (more on that in a minute). First, here are the charts, with Transports first…

And then Industrials…

How could we be getting a Dow Theory bull market signal after stocks have rallied for just about an entire year? 

Two things to note: One, Dow Theory isn’t always right. We may not be at the start of a new bull market or a new leg higher for the current bull market (more on this in a minute). And two, perhaps more importantly, all stocks haven’t been rallying. 

Investor’s Business Daily tells us that the S&P 500 has added $7.6 trillion in value since the start of the so-called “pandemic market,” and more than half of that gain has come from just 19 stocks. (IBD counts the pandemic market as starting a year ago, not from the March lows.)

That’s right — 19 stocks on the S&P 500 gained a little better than $3.8 trillion in value while the other 481 stocks have done just a bit worse than $3.8 trillion. 

I’m pretty sure you know some of the names of the standouts: Apple, Netflix, Microsoft, Tesla, Amazon, etc. In other words, tech stocks.

The only real surprises on the list of 19 are Disney, Walmart, and Nike. I can’t even call Charles Schwab a surprise gainer. After all, we have a pretty good idea of what people are doing with their spare time (*cough cough* GameStop *cough*).

What to Do With This Information

First off, signals like the one Dow Theory just gave off should be thought of as guideposts or road signs. Don’t ever go all in or sell everything because some signal like Dow Theory said so.

Personally, I consider these signals conversation pieces. As in, they’re a call to step back a little and wonder why the signal tripped. I have some thoughts…

GDP growth for this year (2021) is already expected to hit 4.2%. Given the amount of money that has piled up in people’s bank accounts — some estimates go as high as $2 trillion — I can imagine a growth surge even better than 4.2% (provided people don’t lose it all trading GameStop shares first). 

There’s probably some infrastructure spending coming. Some degree of student loan forgiveness seems to be on the table. Throw in accelerating vaccine distribution and early data showing ~90% efficacy for Pfizer’s, seems to me there is reason for at least some optimism. 

As for where to look for new investments, I gotta say, I’m a little leery of tech stocks right now. Tech has been very sensitive to inflationary-type data. Last week, strong retail sales sent the Nasdaq reeling. If we do get growth at 4.2% or better, a little inflation seems inevitable.

As my Wealth Advisory partner Jason Williams wrote on Friday, Warren Buffett just lightened up on Apple and added more exposure to 5G stocks. Solid idea. 

Finally, materials and commodities stocks will do well as the economy expands and some inflation pushes prices higher.

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Wealth Advisory on Youtube

The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.