The clock has started, but don’t bail on stocks yet … what history says about tech stock returns for the next 12 months … nearing a global food crisis
There’s an old Wall Street phrase that feels relevant to where we’re at in the market cycle:
“Enjoy the party, but dance near the door.”
Overall, investors have enjoyed one hell of a stock-market party since March of 2020. And for investors who used the 2018 Christmas panic and the 2020 COVID flash bear market as buying opportunities, your party has been raging since about 2009.
Well, the deejay just announced he’s about to play the last song of the evening. But if past dances are our guide, this song is going to be a banger, so you don’t want to miss it.
For newer Digest readers who are confused, let’s back up to make sure we’re all on the same page.
***Last week, one of the most reliable indicators predicting a coming recession triggered
This happened when the yield on the two-year Treasury climbed above the yield on the 10-year Treasury.
A yield curve is a graphical representation of the yields of all currently available bonds – from short-term to long-term.
In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a two-year bond and more yield from a 10-year bond.
Given this, in healthy market conditions, we usually see a “lower-left” to “upper-right” yield curve.
But when economic conditions become murky and investors are nervous about the future, this can change. Specifically, uncertain economic times tend to flatten the yield curve.
And an inverted 10/2 yield curve has preceded the last eight recessions. If we go further back in time, the inversion has preceded 10 out of the last 13 recessions.
In our analogy above, a recession, and associated pain in the investment markets, is the end of the dance.
However, the good news is that, historically, there’s a substantial lag time between the yield curve inversion and the subsequent recession (if it even happens). And during that period, stocks usually do great.
For example, if we take the 10-2 inversions from 1998, 2005, and 2019, there was an average of 21 months between the inversion and a recession.
Meanwhile, over those months, the S&P averaged a 14.7% gain.
So, this period in between the inversion and the potential recession might be the last song of the dance, but you don’t want to sit it out.
***In recent Digests, we’ve been zeroing in on one of the best ways to play this market dynamic
And that’s top-shelf technology stocks.
We’ve felt confident about this due to research from our hypergrowth expert, Luke Lango.
Regular Digest readers know Luke as the analyst behind Innovation Investor. His specialty is finding market-leading tech innovators that are pioneering explosive trends, capable of generating outsized investor wealth.
Last Friday, Luke sent an email to a handful of department heads here in InvestorPlace. While I’m sure this content will find its way into Luke’s investment services, I wanted to share it with our entire Digest readership.
From Luke’s email:
The charts tell the whole story.
Last 4 yield curve inversions. Same thing happened every time. Tech stocks struggled going into the inversion. Soared after the inversion for well over a year.
History is repeating itself 🙂
Average 12-month forward gains for Nasdaq after an inversion is ~30%.
12-month forward returns were NEVER negative.
The charts Luke references are below. You’ll see the inversions from 1988, 1998, 2006, and 2019.
If you have trouble seeing them, the black vertical lines represent when the yield curve inverted.
The ensuing upswing in the orange lines, which represent the tech-heavy Nasdaq, speak for themselves.
Here’s more from Luke in a recent issue of Daily Notes from his Innovation Investor service:
Historically speaking, the last three inversions sparked massive stock market melt-ups over the subsequent two years.
Moreover, hypergrowth tech stocks are on the heels of their biggest short-term breakout ever, and historically, such big short-term jumps have preceded new bull markets.
Even further, growth stocks tend to outperform in rate-hike cycles, and we’ve just entered one.
Bottom-line, using history as our guide, it’s not time to bail on stocks. Look to high-quality tech stocks to post double-digit returns over the coming months – possibly sooner.
On that note, I’ll add that many of Luke’s Innovation Investor stocks have risen between 30% and 50% over just the last few weeks. If Luke is right, even bigger gains are still ahead.
***Switching gears, last Friday, a Ukrainian counterattack took out a Russian oil depot
While we’re pleased Ukraine has staged such a fierce resistance to Russian aggression, this counterattack results in a second feeling – discomfort.
The reason why is summed up by Kremlin spokesman Dmitry Peskov:
This is not something that can be perceived as creating comfortable conditions for the continuation of negotiations.
For weeks, we’ve been monitoring the war in Ukraine, hoping for a resolution. Obviously, the direct loss of life due to the fighting/bombing, as well as the humanitarian refugee crisis are horrific tragedies.
However, the longer this war goes, the greater the likelihood we’ll see an even bigger, global catastrophe due to food shortages.
In short, Russia and Ukraine are massive contributors to global food production. And this war is jeopardizing that production. (Click here to read a past Digest that dives into detail on this.)
The photograph below from The Wall Street Journal last Friday captures the heart of the problem.
How do you plant the next season’s crop with military equipment, troops, and fighting in the fields?
Beyond this, more than four million Ukrainians have fled the country since the Russian invasions. These are the same people who work the fields, process the harvest, and prepare it for export.
How do you plant for next season when workers have fled to protect their lives?
This is turning into a major problem that could extend well beyond the resolution of the war itself.
From Responsible Statecraft:
The U.N. Food and Agricultural Organization has expressed concern that the war will disrupt Ukraine’s spring harvest and planting season, with consequences for global grain supplies beyond the coming few months.
Rising costs for importing food and fuel will affect household as well as national budgets already stressed by the COVID-19 pandemic.
The military conflict has largely cut off Ukraine’s access to its Black Sea ports, and the Ukrainian government banned grain and other food exports in early March to ensure domestic supplies.
The country’s limited rail capacity to export overland has been further impaired by the demands of war mobilization.
The fighting threatens to interfere with Ukraine’s spring planting season, impacting the labor and resources available for food production over the medium term.
For Russia, heavy and comprehensive financial and trade sanctions have disrupted its ability to export and import.
And the Ukraine war erupted at a time when food prices were already climbing as a result of rising energy, and thus fertilizer and feedstock, costs.
All of this puts pressure on the inflationary spiral in food costs, as well as fertilizer prices.
In past Digests, as ways to try to protect your purchasing power, we highlighted the Invesco DB Agriculture Fund, DBA.
Invesco describes it as a fund “designed for investors who want a cost-effective and convenient way to invest in commodity futures.”
Its top five holdings are futures of wheat, corn, soybeans, sugar, and cattle.
We’ve also highlighted fertilizer companies, which is how legendary investor, Louis Navellier, is playing this dynamic.
(Speaking of Louis, a reminder to join him tomorrow at 4 PM ET for his special Prediction 2022 event.)
Of course, as we showed earlier in today’s Digest, if history repeats itself as we saw thanks to Luke’s research, the next 12 months will be a time of major gains for elite tech stocks.
Returning to the old Wall Street cliché – it appears the final song of the party has just started, but it’s going to be a good one. Get out on the floor.
Have a good evening,