The next stock market recovery looks imminent

As the stock market bear gives way to the bull, some stocks are already turning up and I’m ready to pounce on companies like this.

Illustration of bull and bear

Image source: Getty Images.

I’ve noticed that many investors are excited about the potential of the next stock market rally.

And the bull follows the bear as sure as day follows night. But what’s always unclear is the timing.

Time to buy crushed stocks

However, some are becoming optimistic right now. And one example is portfolio manager Andrew Slimmon of Morgan Stanley Investment Management. In an article last week, Slimmon said he thinks it may be time to buy some “crushed” stocks as recession fears intensify.

I think that view makes sense. It can be emotionally difficult to buy shares when the general economic news is grim. But stocks look ahead and tend to lead events in the real world — sometimes by as much as three, six, or nine months. So, when the economy is heading down, shares may be moving higher in anticipation of better times ahead.

Meanwhile, stock trader and investor Mark Minervini pointed out recently that individual stocks don’t move in lock-step. And that means they can bottom out in a bear market at different times. Sometimes that happens before the main market has found its absolute bottom, or it can happen at the same time. Or it could occur after an index has bottomed — even months later. 

To me, all of this means I shouldn’t hesitate. If a quality stock opportunity arises now, it’s time for me to pull the trigger and buy. And that’s despite the loud chorus of bearish opinions around at the moment. For me, it’s a mistake to listen too much to the ‘talking heads’. And I’m not watching indexes such as the FTSE 250 or the S&P 500. Instead, I’m focusing on individual stocks that interest me and the news flowing from each underlying business. 

Good news in the pocket

During my research I’ve found several businesses that have issued decent trading updates in recent weeks. They’ve been coping well with the economic challenges such as rising input prices and supply chain issues. Sometimes that’s because they are able to raise their selling prices to preserve their profits without customer demand falling much, if at all. However, their share prices have moved lower.

CNBC presenter Jim Cramer said a few days ago that such businesses have “good news in the pocket”. And in many cases their forward-looking growth prospects remain robust. Yet their valuations have moved lower. So, when presented with a better-value situation like that, I’ve been buying. Although there’s no guarantee of a positive long-term investment outcome even though I’ve done my research. 

In a general bear market, many share prices sink with the outflowing tide. But I think it’s interesting that Andrew Slimmon said he’s gradually buying “consumer discretionary stocks that are down 50% or 60%”. To me, that means he’s focusing on cyclical enterprises. 

That could prove to be a good strategy. I remember such beasts performing well at the beginning of previous new bull markets. And one I’m watching is Ferguson, the distributor of plumbing and heating products to professional contractors. The business and the stock performed well after the previous market downturn and I think the sector is resilient.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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