Spanish Flu Hints About the Recovery in Stocks

The world of 1918 had some similarities to our “connected” world today. And we can look back at this period in history for clues about how today’s recovery will look. You might be surprised to hear it… but stocks could go a lot higher, even if the economy is slow to recover.

By Enrique Abeyta, editor, Empire Elite Growth


At this point, you’ve likely heard the comparisons with the current coronavirus crisis to the 1918 Spanish flu pandemic.

This health crisis began in spring 1918 as a particularly deadly strain of the flu. It soon spread across the globe. It didn’t originate in Spain… but the name stuck because Spain was particularly hard-hit.

The spread of the flu was likely worsened by the end of World War I. American troops returned from Europe and then scattered across the U.S. The world had much less international travel back then, but this mass movement of people helped the disease spread.

So the world of 1918 had some similarities to our “connected” world today. And we can look back at this period in history for clues about how today’s recovery will look.

You might be surprised to hear it… but stocks could go a lot higher, even if the economy is slow to recover.


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While certainly different than the current virus, the Spanish flu also had some unique characteristics… For one, it hit adults aged 15 to 44 particularly hard. This is rare in a flu (even a bad one), and it magnified the economic impact.

Medical technology was also less advanced… And the mortality rate was devastating. It infected an estimated 500 million people – more than a quarter of the global population. It also killed as many as 50 million (or by some estimates, 100 million). That’s roughly 3% of the global population.

To put this in perspective – and the coronavirus pandemic isn’t over by any means – we have reportedly seen 300,000 deaths out of a global population of 7.8 billion, or 0.004%.

Losing such a large percentage of working-age adults to the Spanish flu was a huge blow to the global and U.S. economies. Additionally, U.S. cities undertook similar shutdown and quarantine procedures as they have today.

That said, determining the economic impact of the Spanish flu pandemic on the U.S. economy is difficult. We don’t have the same wealth of economic data from back then that we do today, and the death of those working-age adults was a big difference. Other factors also mean that the economic analogies to today aren’t exact.

Still, a recent Wall Street Journal article provided some data from the National Bureau of Economic Research. Looking at an index of industrial production and trade, this measure fell sharply and then bottomed. It quickly recovered some of the losses, but then stayed at a lower level through 1920. (Again, the end of World War I likely also had an effect here.)

The bureau also uses an index of factory employment. This also took a hit, but then recovered to previous highs within 18 months. Part of this drop is likely due to the deaths of 675,000 people in the U.S., or 0.6% of the population.

But let’s take a look at the Dow Jones Industrial Average around this period…

The stock market had a rough year in 1917 – mostly due to World War I – and was recovering in early 1918. During this period of economic disruption and incredible volatility from the pandemic, though, the stock market moved much higher. Take a look…

Today’s economy is a lot different from back then. But even the worst-case scenarios for this crisis predict only a fraction of the mortalities from the Spanish flu. And the disruption to the economy back then was arguably worse than it is today.

Looking back at 1918, the economy took years to recover while employment moved back to previous levels and the stock market soared.

It’s difficult to come up with a strong explanation for why the stock market performed like it did in 1918, much less why it performs like it has today (and we have a ton more data and insight!).

But consider that global governments are injecting huge amounts of liquidity into the economy right now…

One of the criticisms of the economic recovery of the past decade has been that we haven’t seen nearly the same recovery (or growth) in economic output as we did in asset prices.

This could be a reasonable road map for the period we are in right now: Slower recovery in the real world, while the injection of liquidity “supercharges” asset prices. Just take a look at the Dow over the decade following our previous chart…

So how can you navigate through these volatile times?

In today’s market, most stocks are trading in unison.

We are seeing some differences in magnitude. Industries that are the most hard-hit – like airlines, cruise ships, and hospitality – are down the most.

The industries hit the least – like e-commerce, big tech, and software – have fallen less. All but a few areas, though, are down from their highs… and they too have moved together.

Because of that, the individual fundamentals of a company matter less right now than they normally would. The market is driving most individual stocks. You must keep this in mind with any individual trades and your overall portfolio.

And patience is key. While I’m still more optimistic than the consensus is for the intermediate- and long-term outlook… I expect more volatility and market pain is ahead.

A long-term stock rally is the high-probability bet. It doesn’t mean that it’s a 100% certainty, but it makes the most sense for technical and fundamental reasons.

If this happens, investors could be getting a rare chance to buy shares of world-class businesses… stocks with multibagger upside potential. Don’t miss out.


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Is This Bull Market Over?

The stock market is on track for its worst monthly performance in nearly a decade. And October’s ride has been extremely bumpy. This has many people asking, “Is this the start of a bear market, or is the bull market taking a temporary break?” Teeka Tiwari has the answer below…


The market has been roughed up this month…

The Dow is down 7% since October 1. The S&P 500 has fallen over 8.5%. And the tech-heavy Nasdaq has plummeted nearly 10%.

Although 10 years have passed, horrible memories of the 2008 market crash loom in investors’ minds.

“Are we about to tip into a prolonged bear market?” That’s the question on many folks’ minds right now.

It’s a fair question. After all, this is one of the longest bull markets in history. It certainly feels like we’re due, doesn’t it?

But here’s what I’ve learned about markets… They can stay bullish (or bearish) for a very, very long time. Just because we’ve been in a bull market since 2009, doesn’t necessarily mean the party is over.

Let’s rewind to 2011. I remember people telling me the bull market was “long in the tooth” and primed to fall apart. And we did indeed have a 20% correction at the end of that year.

But rather than that being the end, the bull market “reset” itself for even higher highs.

In late 2014, I gave a very bullish speech at the Palm Beach Research Group Infinity conference.

At the time, the Shiller P/E ratio (the price-to-earnings ratio based on the average inflation-adjusted earnings over the previous 10 years) suggested that the market was wildly inflated.

“The bull market is aging,” everyone crowed. And I was roundly criticized for being a reckless bull. At the time, the S&P 500 was at 2,000, and the Dow was at 17,500.

Since then, they have been as high as 2,930 and 26,828, respectively. Those are peak gains of 59% for the S&P 500 and 62% for the Dow.

And we didn’t see those gains in a straight line, either.

The market meandered for about a year… and created a great opportunity for us. We used that period to load up on great names like Nvidia (NVDA), Microchip (MCHP), and Maxim Integrated (MXIM).

We closed those positions with gains of 550%, 65%, and 65%, respectively.

The “reset” period from late 2014 to 2015 gave us the opportunity to pick up those great names on the cheap. Then, like now, people confused a short-term pullback with the beginning of a bear market.

Where Are We Now?

You can see that dismissing a market just because of its age doesn’t work as an analytical tool. Here’s the two-step process I use instead: I ask myself two questions…

  • Why is the market going down?
  • Do I agree or disagree with this logic?

Let’s tackle the first question: Why is the market going down?

The main cause is people fear rising interest rates will act as a headwind to the economy.

Here’s what the Street is thinking…

If interest rates rise, debt will get more expensive, corporate borrowing costs will go up, corporate borrowing will decrease, the economy will slow down, and corporate earnings will drop. Thus, stock prices must fall.

I don’t agree with this thesis… but many people do. And that’s why we could see some more volatility ahead.

Here’s why you need to look past these fears and embrace the opportunities to come…

The yield on the 10-year Treasury is abnormally low. It’s yielding just 3.1%. For the last century, it has historically yielded 6%.

That’s important because when rates start at a normal level of 6% and go to an abnormally high level, then it’s a good bet we’re about to enter a prolonged bear market.

But when rates go from an abnormally low level (like they are now at 3.1%) to a normalized level (6%), guess what happens?


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Instead of Falling, the Market Booms Higher

A word of warning: Just like in 2014 and 2015, the market won’t go higher in a straight line. It will probably have a short-term rally, then get hit lower again.

That see-sawing motion could play out a few times before the market is ready to gun to new highs.

This type of market action is normal and healthy.

But here’s why I think we’ll have more churning action ahead…

Many of today’s Wall Street traders are under 35 years old. They have very little historical knowledge of the stock market. In their Ivy League schools, they were taught that “interest rates going up equals the stock market going down.”

Wall Street traders’ ignorance of how a rising-rate cycle works when coming up off very low rates is a gift.

Their ignorance will create weakness that we will use to buy the next crop of monster winners like Nvidia, Microchip, and Maxim.

Learning From the Past

Please remember interest rates are rising because the economy is improving. A move to normalized rates won’t be enough to slow down the growth machine that the U.S. has become in recent years.

Here’s the proof…

The closest comparison to today’s rate environment is the late 1940s to the late 1960s. During that period, rates rose from abnormally low levels back to normal levels. Using traditional thinking, you’d think this was a terrible time for stocks. But it was the exact opposite.

If you look at GDP growth and stock market growth, the 1950s was the best decade to be in the stock market in the past century. The S&P 500 averaged 19.4% per year. That’s better than in the 1980s or 1990s.

And we saw massive growth in the economy.

Things didn’t begin to slow down until interest rates went over 6%. Equities got crushed after that point. But we’re not anywhere close to that right now.

Remember, the 10-year Treasury is around 3.1%. Rates will have to double from here before they have a meaningful effect on corporate earnings.

The Bottom Line

So to answer my second question from above on whether I agree or disagree with Wall Street’s logic… I strongly disagree.

Wall Street’s logic that higher interest rates will kill the bull market is an incorrect analysis. That means a buying opportunity lies ahead.

Our game plan is the same one I’ve been pounding the table on since late 2014: You want to stay away from bonds and stay invested in high-quality stocks.

As long as interest rates are below the norm, we are excited about the market. The key here is to be patient. Let the market do its volatility dance while we eagerly eye new ideas to bring to you.

 

The “Blackout” For $250 Billion in Spending Is Over

Most investors don’t know this… but the market is about to get a $250 billion injection any day now.

And if you play your cards right, you can position yourself today to get a chunk of it.

Let me explain…

Every three months, companies release their quarterly earnings reports. A positive earnings report can send a company’s stock rising. And a negative report can send it tanking.

Company executives may have access to inside information in these reports before they publish them.

So the Securities and Exchange Commission (SEC) restricts publicly traded companies from trading their own shares during the periods just before and right after earnings.

Wall Street calls these “blackout” periods.

Most companies release earnings in April, July, and October. Here’s why that’s important: The September blackout period for stock buybacks is over.

And when these blackout periods end, the market pops soon after…

As you can see, every third month, the market takes a pause. September was no exception… After rising 7% in July and August, the S&P 500 was flat last month.

But with the blackout now lifted, companies can start repurchasing shares. And they have $250 billion in capital just sitting on the sidelines… waiting to go to work.

We’re still early in October, so it’s not too late to potentially profit from this wave of money. But first, let me tell you where the dry powder is coming from…


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The Super-Cash Refund Worked

Last year, Palm Beach Research Group guru Teeka Tiwari (Palm Beach Confidential, Alpha Edge Method) told me that President Trump would pass a major tax law… and that the new law would be a giant tailwind for corporations.

(See the October 24, 2017 issue of the Daily, “Teeka Tiwari on How to Benefit From President Trump’s Tax Plan.”)

When it went into effect in January 2018, the new law dropped the corporate tax rate from 35% to 21%. So any company that had an effective tax rate of 35% in 2017 would be able to hang onto an additional 14% of its profits in 2018.

But there was another benefit for corporations in Trump’s tax plan… They’d also be able to “repatriate” money held offshore for a one-time, low rate of 15.5%.

Teeka predicted we’d see over $2.6 trillion of offshore cash come back to the U.S. once the law had passed. And that’s already happening…


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Companies are using those repatriated funds—along with the other tax breaks they received—to buy back shares at a breathtaking pace.

According to investment firm Goldman Sachs, we’ve seen a record $762 billion in buybacks in 2018. At that rate, we’ll easily exceed $1 trillion this year.

After the month-long pause, these buybacks are about to continue again. And that’s good news for us…

The Inside Scoop

To find out where all this money is headed, I turned to our Wall Street insider, Jason Bodner.

Jason is the editor of Palm Beach Trader. In the office, we call him our “insider” because he spent nearly 20 years on Wall Street trading stocks for big institutional clients.

If you’re one of Jason’s subscribers, you know he runs a proprietary “early detection” system that looks for unusual buying by institutions. When big institutions start buying, share prices are usually lifted higher and higher.


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According to Jason, now is the time to get in front of the wave of money headed into the markets:

Now that earnings season is about to start, the blackout period will be lifted. And corporations can continue plowing hundreds of billions of dollars into the markets.

I’m looking forward to earnings season. I believe we’re going to continue seeing record sales and earnings. And that will trigger the next leg higher in the markets.

Jason’s system scans over 5,500 U.S. stocks every day. And he’s noticed an increase in unusual buying in the health care sector this past week. So expect some of that capital to head into this sector.

The one-click way to play this is the Health Care Select Sector SPDR ETF (XLV). It holds the largest companies in the health care space—like Johnson & Johnson, Pfizer, and UnitedHealth Group.

Meanwhile, I believe industrials and consumer staples will continue to outperform the market as the trade war dies down ahead of the midterm elections.

Bottom line: Use this time before earnings season to add to your favorite positions.