Power through a possible recession with rising stocks

  • The best thing you can do during bear markets and crashes is to hide in stocks that will jump once the decline is over.
  • The Fed is fully committed to curbing inflation, but many interest rate hikes and significant economic cooling will be needed to get there.
  • Despite the recession, companies with stable growth will continue to grow their revenues and profits at a very healthy pace over the next few years.

The stock market has been crushed recently. It is clear that we are in the middle of a bear market. And the United States seems likely to experience a recession in the next 12 months. That is, if it is no longer there.

This may sound scary. But it doesn’t have to be.

Recessionary periods and bear markets create opportunities to buy once a decade on the stock market.

In other words, the risks of recession are increasing and wider markets are highly volatile. ass we are currently growing a lot of bulls in relation to a certain group of shares.

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

So, don’t despair. Don’t run for cover…

The best thing you can do during bear markets and crashes is to hide in stocks that will jump once the decline is over.

Look at the yield curve of bear markets

There is some frightening evidence to suggest that there has been a major economic slowdown – or worse.

Perhaps the most important of these data is spread between 2- and 10-year bond yields. It has been shrinking rapidly in the last few months. And last Monday, June 13, the yield curve briefly turned minus 2 basis points before normalizing.

Remember that the flattening yield curve is the bond market, which says the economy is slowing. And the inversion of the yield curve has preceded every economic recession since the 1980s.

Since March, we have seen a rapid leveling of the yield curve to below 30 basis points. This is a downward trend that has occurred only six times since 1982.

Four of these six events were followed by an inversion of the yield curve within 12 months. And these inversions subsequently turned into recessions. Two of these six events were swimming followed by an inversion of the yield curve (August 1984 and December 1994). Both times the inversion was prevented by reducing interest rates from the Fed.

Well, in March we saw an inversion of the yield curve. And yet the central bank was quite hawkish.

To cope with high inflation, the Federal Reserve is raising interest rates. Such unprecedented action is expected to come with war in Europe and a slowdown in the labor market. This is not a bullish setting.

Graph showing the change in the 2- and 10-year spread of yields and federal interest rates, also showing periods of recession

The Fed held its meeting on Wednesday this June. The central bank raised interest rates by 75 basis points and signaled a new potential increase of 75 basis points in July. This is the Fed, which will increase more now to increase less later. And he expects the next few big rises to successfully eliminate inflation.

In other words, we are finally seeing the fall in inflation to normal levels. But many interest rate hikes and significant economic cooling will be needed to get there. And frankly, the recession is probably the main case now.

Sounds scary but is not.

How much longer will the shares fall?

In the early 1980s, the US economic recession led to only a 15% drop in stocks. The recession of the early 1990s also led to a decline of only 18%.

Graph showing the change in S&P levels from high values

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

But this is swimming that.

In 2000, we suffered from gross overestimation. IN S&P 500 traded 26X forward gains, with 10-year bond yields above 5%. Today, the market is trading at 22X forward gains, with a 10-year yield below 3.4%. Today’s estimate is lower, both in absolute and relative terms, than we saw in 2000.

Meanwhile, in 2008, the entire US financial system was on the verge of collapse. We don’t have it today. The balance sheets of banks, corporations and households are heavy and very strong. Interest rates are still relatively low. We have no other 2008 on the horizon.

So, in the grand scheme of things, we are faced with what is likely to be a shallow recession. It is likely to follow those of the early 1980s and early 1990s, when shares fell by about 20-30%.

Buying a decline during the bear market

Over the last few months, we have seen some sharp declines in stocks. And in such an unpredictable climate, it is too early to call the bottom of the markets. But we believe that stocks with hypergrowth are very close to one. And now may be the time to start buying dip.

Because lower consumer confidence leads to less cost. Lower costs lead to lower demand-side inflation. That may be what the Federal Reserve hopes for. That is, because the specter of higher rates removes all assets (crypto, stocks, housing), consumer spending is limited. And demand is slowing. And this coincides with the normalization of global supply chains. Supply is rising and demand is falling.

This is upward to slow inflation.

However, the number of consumer loans is reaching new highs, which may signal that they are still spending by maximizing their credit cards. After all, people still need food, shelter and transportation. So the cost can be limited by just that.

So proceed with caution. If you buy a dip, don’t forget to invest only what you can afford to lose. Take a bite here and there, averaging costs down to your positions. If rising stocks need to fall further, the decline will be rapid. By averaging costs, you can limit your shortcoming while allowing for a further increase when the market rises again. Don’t buy dip at once.

Growth stocks gain after the collapse is over

At the top of this note, we wrote that we are very focused on a particular group of stocks at the moment. This group is technology stocks for overgrowth.

I know. This may sound counterintuitive. But follow me here …

In our leading product for investment research An investor at an early stage, we invest in stocks in the long run. We have identified a specific group of stocks that have been unnecessarily hammered, despite sporting profits and revenues. And these stocks have a very good chance to return to historic highs.

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

Despite the recession, companies with stable growth will continue to grow their revenues and profits at a very healthy pace over the next few years.

In other words, their “blue lines” in the diagram above will continue to move up and to the right. Ultimately, their “red lines” – or their stock prices – will follow suit.

That is why today we are very keen on rising stocks.

Their blue lines (earnings) continue to rise and rise, while their red lines (stock prices) fall sharply. This is an irrational discrepancy that occurs about once a decade during an economic crisis. And it is always decided in a rapid convergence, in which stock prices rise to capture revenue.

Opportunity for a bear market in rising stocks

Despite the current market climate, this is not the time for madness.

Remember: Crises create opportunities. This is the case with stocks forever. This time is no different.

And in the current crisis, the opportunity is especially great in growth stocks. We fully believe that once this bear market is over – and it will be – some growth stocks will fall by 100%, 200% and even 300% plus profits.

The investment significance? It is time for turn your back on right growing stocks.

First published on InvestorPlace. Read here.

Credit to the image: by Ketut Subianto; Pexels; Thank you!

The message Power through a possible recession with rising stocks appeared first on Read write.

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