Have you ever heard of permabears?
No, these are not fluffy animals from the far north.
Permabears are investors who have a permanent negative view of the stock market. They are forever bearish.
If you knew me over the last year-and-a-half, you would probably put me in that camp… and with good reason.
With the economy slowing, the manufacturing sector entering a recession, and the Fed unwilling to step in, it was unreasonable to remain bullish.
Lately, however, I’ve changed my views. I no longer believe there’s going to be a 2020 recession.
The only way I see that happening is if the U.S.-China trade war escalates, and the countries impose even more tariffs on each other.
Fortunately, that’s in no one’s interest. Both Trump and Xi are in dire need of a deal, which is good news for the markets.
However, the real reason stocks will rise from here on out lies elsewhere.
Since the last crisis, one indicator has been better at predicting the market direction than any other… and it’s signaling this is the time to buy.
The One Indicator To Watch For Profits
Back in January, I wrote The One Indicator To Watch For Profits In 2019.
I urge you to read that dispatch again. In short, the indicator I’m talking about is liquidity.
Since the Great Recession, every major stock market move has come on the back of a central bank intervention.
As you can see, there is a clear correlation. Every time central banks start pumping money into the economy, the stock market accelerates… and that’s exactly what’s happening now.
About three weeks ago, the Fed silently launched a new QE (quantitative easing) program.
For the first time since the end of QE3 in 2014, the Fed is expanding its balance sheet.
The official stance is that they’re supporting the repo market (a form of short-term borrowing between financial institutions), not the economy, and that this is not QE4.
However, nobody believes them. As the old saying goes: If it looks like a duck and quacks like a duck, it’s a duck.
And when you couple this new “not-a-QE” with the Fed interest rate cuts and improving U.S.-China relations, you get a perfect cocktail for a stock market rise.
Which Sector Will Perform Best?
The only question remains: How to invest?
The S&P 500 is an obvious choice, but there are better trades out there.
Another key indicator to watch for future market directions is the Russell 2000. It’s an index comprising roughly 2,000 U.S. small-cap stocks.
Because these companies primarily do business on the domestic market, the Russell 200 is a far better representation of the health of the U.S. economy than, for example, the S&P 500, which includes many multinational names.
It’s also a better performer, yielding higher returns in positive market environments such as the one we’re looking at right now.
Meaning, this is an excellent time to buy it.
If you’re looking to invest, opt for an ETF called Schwab U.S. Small-Cap (SCHA). It’s got plenty of volumes and a much cheaper expense ratio than its competitors.