We're Living in a 'Stock Picker's Market'

Editor's note: This Weekend Edition, we're taking a break from our usual fare. In this essay, adapted from a recent Chaikin PowerFeed essay, Marc Chaikin explains the type of market we're in today... and how to stay afloat despite the volatility, risk, and uncertainty that lie ahead.

Folks, I don't mean to be overly dramatic... But the narratives driving the market are rapidly changing again.

I recently alerted Chaikin PowerFeed readers to a massive shift in the markets. And now, it's playing out in real time...

Investors finally got some relief from the relentless stock market decline of 2022.

Through August 16, the S&P 500 Index rallied about 17% off its mid-June bottom. The tech-heavy Nasdaq Composite Index gained roughly 23% over a similar span.

But the thing is, we technically never escaped "correction" territory. And we just got further proof of the ever-changing times we're living in...

The S&P 500 is down more than 7% over the past two weeks. It remains about 18% below its all-time high in early January.

Meanwhile, the Nasdaq is down more than 9% since August 15. And it's still around 27% below its peak from last November.

Of course, regardless of what's happening in the broader market, investors can almost always find attractive opportunities in some areas even as others languish.

That's what I want to discuss with you today. In short, we're living in a "stock picker's market"...

It's a lot different from the past 40 years. Investors had gotten used to persistent declines in interest rates causing price-to-earnings (P/E) ratios to rise across the board.

That era is now over...

For stocks to rise from here, companies will need to truly grow their earnings. Or we'll need to find company-specific reasons to justify investing in companies with higher P/E ratios. That's what I mean when I talk about a stock picker's market.

Stocks will move up or down mainly based on company merit. If we misjudge anything, we can't count on the Federal Reserve's generosity to hand us good equity returns anyway.

And based on the rhetoric coming out of the Fed, we can't expect any generosity...

Fighting inflation remains the central bank's top priority. It seems willing to drive interest rates as high as needed to achieve that goal, even if it results in a prolonged recession.

Plus, the Fed's impatience with "lags" is dangerous... If it raises rates on a Wednesday, we can't expect inflation to fall on Thursday. It can take a year or longer to see real results across the U.S. economy.

However, the Fed wants to solve inflation now...

If it feels like its efforts aren't working to slow inflation, it could raise rates too far, too fast. And that could lead to a lengthy recession.

So don't go running headlong back into all stocks just yet...

As we've seen again over the past couple of weeks, a lot of uncertainty, risk, and volatility remain in the market. And to build long-term wealth, it's just as important for you to avoid getting trapped in any bad investments as it is to find winning ones.

Stay vigilant in the coming weeks. Rallies like the one that happened from mid-June through mid-August can be incredibly painful for investors who take a wrong step.

Fortunately, we have the Power Gauge at our side...

The Power Gauge points to the most opportune sectors, subsectors, and individual stocks. And from there, it takes an active approach to get our investing decisions right.

In other words, the Power Gauge is the perfect partner as the market processes its next phase.

Good investing,

Marc Chaikin

Editor's note: Earlier this year, Marc warned of a market phenomenon that hasn't happened in years... and it's now unfolding. With the Power Gauge's help, we can take advantage of this shift in ways other investors can't. Marc says this could be the beginning of a massive opportunity in a special group of U.S. stocks... But if you ignore what's coming next, you could be putting your wealth at risk. Click here for all the details.