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Power through the bear market with growth stocks


Lately the stock market has been crashing. It is clear that we are in the middle of a bear market. And we think it’s time to start considering that the US economy could be heading into a recession. That’s if it’s not already there.

It may sound scary. But it shouldn’t be.

Recessions and bear markets create once-in-a-decade buying opportunities in the stock market. And our 1,000% divergence portfolio – in our premium research advisory – is perfectly positioned to capitalize on these huge opportunities.

In other words, the risks of recession are increasing and the markets at large are very volatile. But we are increasingly bullish on a particular group of stocks at the moment.

Source: whiteMocca / Shutterstock.com

Historically, crises have created opportunities. This time is no different. And the opportunities we see right now are potentially life changing.

So don’t panic. Don’t run for cover…

The best thing to do during bear markets and crashes is to fall back on stocks that will soar once the recession passes.

Observe the yield curve in bear markets

There’s some scary data implying that a big economic downturn – or worse – has arrived.

Perhaps the most important of these data points is the spread between 10-year and 2-year Treasury yields. It has rapidly declined over the past few months. As of this writing, the 10-year yield is only about 28 basis points above the 2-year yield.

Remember that a flattening of the yield curve is the bond market saying that an economic slowdown is coming. And an inversion of the yield curve has preceded every economic recession since 1980.

Since March, we have seen a rapid flattening of the yield curve to less than 30 basis points. This is a bearish momentum that has only happened six times since 1982.

Four of these six occurrences were followed by an inversion of the yield curve within 12 months. And these reversals then turned into recessions. Two of these six events were do not followed by an inversion of the yield curve (August 1984 and December 1994). Both times, a reversal was avoided by the Fed’s rate cut.

Well, last month we saw an inversion of the yield curve. And even still, the central bank has been quite hawkish.

Indeed, instead of cutting rates in this rapid flattening, the Federal Reserve is raising them. And such unprecedented action is expected to occur alongside a war in Europe and high inflation numbers for decades. This is not a bullish setup.

Power through the bear market with growth stocks

Now we think a recession will be averted by the Fed’s dovish pivot by summer. Although the data clearly indicates that the risks of recession are increasing.

It’s scary but it’s not.

How much will stocks fall?

You might think that recessions and bear markets go hand in hand. But they don’t. In fact, “normal” recessions do not lead to bear markets.

In the early 1980s, an economic recession in the United States caused stocks to drop only 15%. The recession of the early 1990s also resulted in a decline of only 18%.

Power through the bear market with growth stocks

Of course, the recessions of the early 2000s led to a stock market crash of 40%, while the 2008 recession sent stocks down 50%.

But it’s do not that.

In 2000, we suffered from gross overvaluation. the S&P500 was trading at 26 times forward earnings, with a 10-year Treasury yield above 5%. Today, the market is trading at 22 times forward earnings, with the 10-year yield below 3%. Today’s valuation is lower in both absolute and relative terms than what we saw in 2000.

Meanwhile, in 2008, the entire US financial system was on the verge of collapse. We don’t have that today. Bank, corporate and household balance sheets are cash-rich and very strong. Interest rates are still relatively low. We don’t have another 2008 on the horizon.

So in the grand scheme of things we are faced with what will likely be a ordinary recession. It will likely follow those of the early 1980s and early 1990s, when stocks fell less than 20%.

Buy the dip during a bear market

Over the past few months, we have seen sharp declines in equities. And in such an unpredictable climate, it’s far too early to call a market bottom. But we think hypergrowth stocks are very close to one. And now, maybe it’s time to start buying the dip.

For example, today we see stocks reacting to falling import prices. Analysts were expecting a 0.6% gain in import prices in April. Instead, overseas goods held steady. Additionally, consumer confidence fell to a new 11-year low in May. This signals that consumers are worried about inflation. But stocks jumped higher today, with the S&P climbing 2.23% at the time of this writing. Essentially, we see bad news translating into good price action.

Why?

Because lower consumer confidence leads to less spending. Less spending leads to lower inflation on the demand side. This could very well be what the Federal Reserve is hoping for. In other words, while the specter of higher rates drives down all assets (crypto, stocks, housing), consumer spending is reduced. And demand is slowing.

This is bullish for a slowdown in inflation.

However, consumer credit numbers are reaching new highs, which could indicate that they are still spending by maxing out their credit cards. After all, people still need food, shelter and transportation. Thus, expenditure can only be limited to a certain extent.

So proceed with caution. If you buy the dip, be sure to only invest what you can afford to lose. Take a nibble here and there by averaging the costs across your positions. If growth stocks are to fall further, the declines will be rapid. By cost averaging, you can limit your downside while still allowing for further upside when the market recovers again. Don’t buy the dip all at once.

The good news is that I have the perfect portfolio of stocks that will benefit from a massive rebound in the coming months – Divergence stocks.

Growth stocks gain once the crash passes

At the top of this note we wrote that we are very bullish on a certain group of stocks at the moment. This group is made up of hypergrowth technology stocks.

I know. This may seem counter-intuitive. But follow me here…

In our flagship investment research product Early-stage investor, we invest in stocks for the long term. We have identified a particular group of stocks that have been unnecessarily beaten despite rising earnings and revenue. These “divergent” stocks have a very good chance of returning to all-time highs, which is why we’ve included them in our 1000% Divergence Portfolio.

See the chart below, which illustrates the strong positive correlation between the S&P 500 price and sales. Numerically, this is a positive correlation of 0.88, or almost perfectly correlated. You’re not much more closely correlated than that in the real world.

Power through the bear market with growth stocks

Regardless of a recession, strong growth companies will continue to grow revenues and profits at a very healthy pace over the next few years.

In other words, their “blue lines” from the chart above will continue to move up and to the right. Eventually, their “red lines” — or their stock prices — will follow.

That’s why we’re very bullish on growth stocks today.

Their blue lines (revenues) continue to rise higher and higher, while their red lines (stock prices) fall sharply. This is an irrational divergence that appears about once a decade during times of economic crisis. And it always resolves into rapid convergence, where stock prices rally to catch up with earnings.

Bear Market Opportunity in Growth Stocks

Despite the current market climate, now is not the time to panic.

Remember: crises create opportunities. In equities, this has always been the case. This time is no different.

And, in the current crisis, the opportunity is particularly great in growth stocks. We are confident that once this bear market is over – and it will be – some growth stocks will post gains of 100%, 200% and even 300% and more.

The investment implication? It’s time to crouch in the to the right growth stocks.

As of the date of publication, Luke Lango had (neither directly nor indirectly) any position in the securities mentioned in this article.

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