The Stock Market Is About to Make a BIG Move

[00:00:00] Speaker 1: the stock market could be gearing up to make a very big move over the next couple of weeks of late investors have seen fear levels increase based on the recent sell-off in technology and ai stocks and when you look here at the fear and greed index we can see that it has dipped into extreme fear with a value of 23 which is a big change from where things were just a week ago at 46 in the neutral state the rising momentum we have seen in the market well it has halted and the 125 day moving average sits at 75 45 which is only about two percent from where markets sit at today and as you can see earlier in the year what happened when we broke below that the market really fell but there's something happening behind the scenes that i believe deserves a lot more attention and before we dive into that do me a huge favor show your appreciation for these videos by smashing that like button down below and while you're doing that comment below your largest holding in your portfolio could be a stock or an etf it's always fun to see those okay with that now let's jump back into the video because right now we are just a few weeks away from the midterm elections and historically what happens to the stock market after midterm elections it's pretty remarkable in fact looking back over the past several decades the s p 500 has delivered positive returns in the 12 months following every midterm election we are not talking about the last five midterm elections or every other midterm election but every midterm election and for investors the mindset needs to remain focused on long-term success and to not get caught up with the near-term volatility and the fear that creeps into the market for investors with soft hands but that's not the only potential catalyst we've also seen a significant pullback in tech stocks including some of the biggest beneficiaries in this ai revolution and in sunday's edition of the weekly investor playbook i detailed a few stocks i was in fact buying the dip on and if you want to receive these trade alerts anytime i make a move in my portfolio or an option trade get my weekly or daily market analysis make sure you're part of my private investing community you can check that out in the pinned comment down below but on top of that what i was just discussing there's another development that could completely change the outlook of inflation what if the war with iran were to end i think that's something many of us would agree and like to see happen but we aren't here to get political because i'd rather discuss the impacts on the market but what would happen if to oil prices what would happen and that mean for inflation and perhaps most importantly what would that mean for the federal reserve and the stock market because when i put these three things together i believe we could be approaching a very interesting opportunity for investors and let's break it down here today let's start first though with those midterm elections that are fast approaching now i know a lot of investors don't necessarily enjoy mixing politics and investing and i understand that neither do i but i'm not interested here in telling you which political party is better for the stock market i'm interested in what history tells us and when we look at historical stock market performance surrounding the midterm elections that's very interesting pattern we're seeing as you can see here according to the research from jp morgan asset management going back all the way to 1950 the s p 500 has generated positive returns in the 12 months following every midterm election with an average gain of not just a few percentage points but approximately 15 percent that's a remarkable historical record now looking here at this bloomberg image you can see that post midterm election has a 100 win rate we've already established that but look at that median six month rate of return of nearly 14 percent and roughly a 30 percent gain from the midterm lows after 12 months so the exact number depends on the data set but the conclusion is similar the 12 months following midterm elections have historically been one of the strongest periods for the stock market now why does that happen i believe a big part of that explanation comes down to something we talk a lot about on this channel what do investors not like they don't like uncertainty and think about it what happens leading up to an election investors are trying to figure out which party will control congress what will happen to taxes what about government spending and regulations what does all of this mean for corporate earnings markets generally don't like uncertainty and as election day approaches that uncertainty can create volatility but once the election is completed investors have a much clearer understanding of the political landscape and they can begin adjusting their expectations accordingly now does that mean the stock market automatically rallies the day after the election no not necessarily and i want to make that distinction clear we're talking about historical performance 12 months after the midterm elections not a guarantee that stocks will immediately move higher on november 4th but now there's another statistic i find particularly interesting according to that bloomberg research since 1950 the s p 500 has generated an average return of approximately 14 percent in the six months immediately following those midterm elections that's a pretty strong historical tailwind for investors remember this isn't necessarily about republicans or democrats and who wins the more important factor may be that investors finally have a clearer picture now i wouldn't make investment decisions based solely on election history the economy corporate earnings inflation interest rates are ultimately going to matter much more but what we're already seeing is weakness in certain parts of the stock market and we know that one of the historical stronger seasonal periods is approaching in fact we're just getting started in it right now and i think that's worth paying attention to and speaking of politics there's a lot of pushback right now on data centers in certain states and i feel like a lot of that stuff is going to go away quietly post midterms it's a great speaking point now but not a priority for either side and that's another tailwind for the ai sector and that brings us to the second part of this discussion because some of the biggest technology companies have recently come under significant selling pressure and here's what i find most interesting investors need to bifurcate stock price from company results some of these ai names have pulled back 10 20 or more in just a matter of a few weeks their revenues haven't their cash flows continue to climb their earnings continue to climb yet their valuations are much more intriguing today than they were just a few weeks ago but the market is becoming increasingly concerned about valuations and the cost of financing around this ai infrastructure boom last week the philadelphia semiconductor index it declined more than 10 percent and some of the more speculative ai infrastructure companies experience even larger declines that's a significant move in a short period of time but here's the question is the stock market selling these stocks because their businesses are deteriorating or because investors are becoming less willing to pay such high valuations those are two very different things and the key right now is to focus on companies with backlog not necessarily on companies telling investors what could happen in the future companies like nvidia broadcom amd marvell they are producing real ai earnings today now i believe some of the concerns in fact are justified we've seen an enormous amount of capital flowing into ai companies are spending billions building data centers they're purchasing advanced semiconductors they're developing increasingly powerful ai models and they're taking on significant financial obligations to fund that expansion companies like core weave or oracle those are not high quality names in my book nor will you find them in my portfolio at some point investors are going to demand a return on that investment and that time is near and that's exactly what we're beginning to see wall street wants to know when all this spending is going to translate into sustainable profits and free cash flow but here's where i think investors need to be careful we shouldn't assume every ai related company has the same financial profile there's a big difference between a company generating billions of dollars in free cash flow and a company relying on borrowed money to fund an expansion and hope for gains down the road and that's why i'm becoming increasingly selective i'm not interested in buying every tech stock simply because it's down 15 to 20 percent i want companies with strong competitive advantages growing earnings healthy balance sheets and attractive valuations relative to their future growth now here's another interesting development following last week's sell-off we saw tech stocks begin rebounding just this week on monday the nasdaq gained approximately one percent while semiconductor stocks also recovered some of their losses does that mean the correction is over or just a head fake one strong trading day doesn't establish a new uptrend but it does demonstrate how quickly sentiment can change and if we begin seeing additional catalysts that improve its economic outlook some of these beaten down tech stocks they can recover quite fast and be back at new all-time highs and we are about to get some big earnings updates from many companies but not just that pay close attention to the commentary from management on guidance and outlook that's what's going to move the stock and that brings me to what i believe could be one of the biggest potential catalysts for the entire market moving forward something that has very little to do with ai in fact and everything to do with energy prices what if the war ended because right now we are seeing a trend reversal in inflation a trend reversal in the wrong direction prices across the board are rising prices at the pump are quite high especially here in california where for some reason our gas prices are higher than the state of hawaii but i think we can all agree higher oil prices is the primary culprit for higher prices and inflation the conflict has contributed to significant disruptions in the energy markets and those disruptions have helped keep oil prices elevated but what happens if we begin seeing a meaningful de-escalation do i think it will happen this week no do i think it will happen this year i'm hopeful and if that happens you better believe the economic implications could be significant and here's why when oil prices rise the impact extends far beyond the prices at the pump higher oil prices increase transportation costs they can raise the cost of manufacturing and distributing products they affect airlines trucking companies shipping businesses and ultimately us consumers now not every business passes these costs directly on to customers but for the most part they do but higher energy prices can contribute to inflation throughout the economy and that's exactly why the current conflict matters so much according to the u.s energy information administration's october outlook disruptions to the middle east oil production and transportation have kept prices elevated i don't think we need to be a rocket scientist or some grand economist to figure that out however this is more important the eia projects that brent crude could decline toward an average of approximately 87 dollars per barrel the next quarter or sorry the second quarter of 2027 with further declines later in that year as supply conditions improve again that's a forecast not a guarantee but imagine what could happen if the conflict ended sooner rather than later and energy markets begin normalizing because the consensus right now is these higher oil prices is the main culprit for high inflation but if we get a conflict truce oil prices could decline gas prices could follow transportation costs could ease and some of the inflationary pressure we've been experiencing could begin to moderate now this would be a headwind turning into a tailwind for us investors the thing is when you are an investor and managing your own money the way i do you want to assess headwinds and tailwinds as well as potential catalysts in both directions this is a clear catalyst that could send stocks higher now i want to be clear an end to the war would not automatically solve inflation immediately but remember the markets are forward thinking inflation doesn't have to fall today for the markets to move today and all of that would be a big help but it wouldn't solve everything we still have other sources of price pressures housing costs services labor costs and potentially tariffs and other supply chain issues but energy is an important component of the inflation picture and as a sustained decline in energy prices could make the federal reserve's job a whole heck of a lot easier which brings us to the next part of the equation what this could mean for the fed the federal reserve is currently dealing with a difficult situation inflation remains above its two percent target and we also see a shaky market just last week we got some bad inflation readings from both cpi as well as ppi and then their preferred gauge which is pce that doesn't come out until the end of the month and policy makers have to determine whether interest rates are restricted of enough to bring inflation back under control and according to the latest fed watch tool the fed is expected to hold its benchmark rate steady during their october 27 and 28th meeting with the target range currently at 3.75 to 4 percent more than 80 chance things hold steady but this has been seesawing all over the place just a month ago odds were in favor of a hike but let me tell you who has not been seesawing and who's been spot on with all of this not overreacting to every piece of data like the media does i've been saying all along that i believe a hike is not coming in the month of october and that leaves the final chance being in december which gives the fed a lot more data that they can see and analyze before making a decision but here's what could change the outlook if energy prices begin falling and inflation starts moderating the fed may have eventually much more flexibility that doesn't necessarily mean immediate rate cuts but it could reduce the pressure for additional rate hikes and that would be important for the stock market why because when we look here at probabilities the market in fact is predicting three more rate hikes by the end of 2027 they're going to get one in december they believe and another in the spring of next year and a third in april of 2027 if all of a sudden things change and there is no longer the course that they're headed on and less hikes are in the books which i believe is a huge likelihood this could be massive for stocks why because interest rates affect borrowing costs throughout the economy they influence mortgage rates corporate financing and spending and the valuations investors are willing to pay for future earnings growth companies can be particularly sensitive to changes in interest rate expectations so imagine a scenario where we begin seeing several developments happening together the midterm elections are completed reducing some of the political uncertainty technology stocks begin stabilizing after a significant correction energy prices start to decline following improvement potential in the geopolitical conditions and inflation begins moderating giving the fed much more flexibility that's a combination that could provide meaningful support for the stock market again another potential catalyst for stocks but there's also a risk if inflation remains elevated the war continues and corporate earnings begin weakening the market could experience additional downside and that is what you need to assess as a portfolio manager for yourself so i'm not suggesting investors should assume the bullish scenario is guaranteed i'm saying there are several important catalysts approaching and the market could react significantly as we get more clarity so what am i doing with all of this information first i'm not trying to predict exactly where the stock market will be next week i don't care about the short term ai stocks fell last week i didn't care one bit in fact i was actually excited i put money to work and again if you're interested in seeing my option play stocks i'm buying and get my weekly analysis make sure you're part of that private investing community the stock investors edge there's a link down in the pin comment so what am i doing though i'm sticking to my plan and i'm certainly not investing based solely on historical midterm election returns but i am paying close attention to the opportunities being created by recent volatility particularly in high quality tech companies because as you often hear me say i'm a big believer in time in the market over trying to time the market i'm looking for businesses that continue generating strong earnings and operating cash flow companies with durable competitive advantages and companies that continue growing even in the economic environment if it remains challenging but i'm also keeping my options open because if we experience another leg lower in the stock market i want to be in a position where i could take advantage of that and i think that's important you don't have to invest all of your available cash at once sometimes building positions gradually can be more effective approach especially when volatility is elevated like it is now now one thing i want investors to understand is that historical patterns are useful but they don't replace fundamental analysis the fact that stocks have performed well after midterm elections doesn't mean the market can't decline or individual stocks can't decline and the possibility of lower inflation doesn't guarantee that interest rates will immediately fall but when several potential catalysts begin lining up like they are i believe investors should pay close attention because the stock market again it's forward-looking and by the time the economic news becomes overwhelmingly positive stock prices will likely they've already moved and maybe significantly so here's where we stand we're approaching the midterm elections a period that has historically been very strong for the market that's a plus for the markets we're in the fourth quarter a period that is also historically very strong for stocks that's a plus for the market tech stocks have experienced a significant pullback in some names potentially creating opportunities in some high quality businesses that's a potential plus for investors who are looking to buy the dip and an important geopolitical situation could help lower energy prices and reduce inflationary pressures again a potential plus for the markets now none of these developments guarantees a rally but i believe the combination makes the next several weeks particularly important a period in which big money can be made and here's the question i want to leave with you are we witnessing the beginning of a larger stock market correction or are investors being presented with the next big opportunity before the next big rally personally i'm going to continue focusing on high quality companies at attractive valuations and long-term opportunities although volatility will be present i don't see things as broken right now and again i don't believe successful investing requires predicting every short-term market move it requires having a strategy and remaining disciplined when volatility creates opportunities now i want to hear from you do you believe the stock market is preparing for a major rally into the close of the year or do you think inflation and interest rates will continue putting pressure on stocks and we could see further pullbacks let me know down in the comments and again if you enjoyed this video make sure you smash that like button down below i truly appreciate it subscribe to the channel and we'll see you in the next one take care