Did we just bottom?
The stock market has been freaking out over the past few weeks as a rapid rise in long-term interest rates – the 10-Year Treasury yield has risen a historic 30 basis points in February alone – has put downward pressure on equities.
This pressure has been especially intense in growth-focused tech stocks with rich valuations, since the richer valuation, the more dependent the stock is on low rates to sustain a stretched valuation.
The tech-heavy Nasdaq dropped as much as 8% over the past week.
But yesterday was a pivotal day.
When the stock market opened, it was a bloodbath. Everything was down. Big. Many hypergrowth stocks were down 10%, 15%, 20%, or more.
But then the selling calmed down. Buyers came into the market. And by the end of the day, most of the market had turned positive.
Specifically, the S&P 500 at its low yesterday was down 1.8%. It closed the day up 0.1%. That 2%-plus swing from down big to up is the biggest intraday swing the index has posted since June 15, 2020.
What was happening back on June 15? Stocks were on the tail-end of a multi-day sell-off. The June 15 intraday move marked the end of that sell-off. Over the next two months, the S&P 500 gained more than 10%.
Before that, the largest intraday move came in 3.1% swing on May 14. Same story there. The stock market was on the back-end of a multi-day sell-off. The May 14 big intraday swing marked the bottom. Over the next few weeks, the S&P 500 gained more than 10%.
Folks… history has a tendency to repeat itself… and I think that’s exactly what is going on here.
The worst of this sell-off may be over.
We may have just bottomed.
Now, regardless if this is the bottom or not, this sell-off will eventually end and be replaced by a longer-term uptrend. That’s because the catalyst for the sell-off – a sharp rise in interest rates – is both ephemeral and overstated.
Rates are pushing higher right now because of huge fiscal and monetary stimulus. That inflationary force will continue for the foreseeable future. But it’s simultaneously fighting against much-bigger, much-more-enduring deflationary forces in automation and globalization.
That is, automated technology is capable of replacing millions of jobs today. Think language processing software automating call-centers and customer service reps. Think self-check-out kiosks automating cashiers. Think telehealth platforms automating front-desk folks at hospitals.
Technology has advanced to the point of being ready to replace millions of jobs. At the same time, thanks to Covid-19, more and more enterprises are comfortable with adopting these technologies. The result is that, over the next few years, we are going to see huge and permanent job loss in some sectors of the economy.
That’s an enormous deflationary force.
Equally as powerful is globalization, as the global geopolitical stage is now set for globalization to come back into the spotlight and for companies to more aggressively outsource labor and production – which will keep consumer prices low.
So… yes… the government is spending a bunch of money… but they almost have to spend a ton of money just to keep rates from going negative.
Long-term, we are stuck in a lower-for-longer situation when it comes to interest rates.
That’s important, because while higher rates will hurt equity valuations, my numerical analysis of the relationship between interest rates and equity valuations dating back to the 1980s found that the 10-Year Treasury yield would have to rise to 2.5% before it started to have a meaningful impact on valuations.
News flash: That isn’t going to happen anytime soon.
So, buy the dip.
This sell-off – like previous market sell-offs over the past year (and decade, even) – is an opportunity to add on weakness, and nothing more.
It’s an especially attracting buying opportunity into hypergrowth, innovative companies whose stock prices have been hammered in February. These companies are still changing the world. They still have all the earnings power. Their stock prices are just undergoing a temporary valuation reset.
This reset will end soon. When it does, money will flow back into these stocks, and they’ll power way higher in the long run.
So which hypergrowth stocks am I looking to buy on the dip?
There’s 30 actually – and I’ve put all of them into a carefully-curated, smartly-constructed portfolio in my new Innovation Investor research product.
This is a portfolio of some of the most important, world-changing companies of the day… all of whom have enormous long-term potential… with stock prices that could soar several hundred percent in the coming years.
And most of these winning stocks have been chopped down in February to mouth-watering prices…
The time to buy these stocks is now.