Record inflation – again … Luke Lango sees “peak fear” in the market … history says a rally is coming … how to dip your toe in the market if you’re nervous
Another month, another 40-year record in inflation.
This morning, we learned the consumer price index for March came in at 8.5%. That’s even higher than the nosebleed forecast of 8.4%.
It’s the highest reading since December of 1981.
Despite the data, stocks surged after the bell. This is because core inflation appears to be easing, rising 0.3% for the month, less than the 0.5% estimate.
The hope is that as we move deeper into the year, the big inflation increases of last year will mean a higher comparison base. From a mathematical perspective, that should reduce inflation rates.
Of course, it won’t necessarily help your wallet. It will just alleviate historical inflation headline numbers.
Perhaps traders realized this as today’s session went on, which is why the gains from this morning disappeared in the afternoon. As I write mid-afternoon, all three major indexes have turned negative.
***This market is fraying investors’ nerves
In recent weeks, investors have been growing increasingly sour looking forward.
But if our hypergrowth expert Luke Lango is right, this isn’t a sign of a coming collapse. Instead, it’s a contrarian indicator suggesting a “rip-your-face-off rally” is in the cards.
From Luke in last week’s issue of Hypergrowth Investing:
Folks, the reality is that recessions and crashes don’t happen when everyone expects them to. They happen when everyone doesn’t expect them.
Last week, CNBC reported that more than 80% of U.S. adults are worried about a recession.
At face value, this is obviously a negative metric. But if history is our guide, this level of fear is a reason why stocks aren’t on the edge of a calamitous drop.
Back to Luke:
The stock market most recently crashed in March 2020 due to the Covid-19 pandemic. What were folks thinking in January and February?
They were bullish. Consumer sentiment hit a multi-year high of 101 in February 2020…
Let’s rewind further to the 2008 Great Financial Crisis, which started in late 2007.
In early-to-mid 2007, we again see that consumers were generally bullish and unconcerned about a recession. Consumer sentiment was clocking in consistently north of 80 — very solid readings.
What about the 2000 Dot Com Crash? Heading into that, consumers were wildly optimistic. Consumer sentiment was regularly above 100 for most of 1999 and 2000.
And as for the 1990 recession, consumers were extremely optimistic and unconcerned with economic downturn before it as well. Throughout 1989 and 1990, consumer sentiment was often above 90…
We see it time and time again. Recessions and stock market crashes always follow periods of peak euphoria – not peak fear.
***What the stock market does after times of peak fear
Luke writes that, right now, we’re in “peak fear.”
As one illustration of this, we can look at the University of Michigan Consumer Sentiment report:
The Consumer Sentiment Index fell to 59.4 in the March 2022 survey, down from 62.8 in February and 84.9 last March—a 30% decline from last year…
Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid-1940s, said U-M economist Richard Curtin, director of the surveys.
Hardly encouraging. So, why is Luke finding reasons to be bullish?
Back to his update:
We’ve seen such big drops in sentiment to ultra-low levels of 60 or below just five times before. They were mid-2011, late 2008, late 1990, early 1980 and late 1974.
Each time, the plunge in consumer sentiment came on the heels of a stock market selloff.
Four out of the five times, though, stocks rallied over the next three months. And all five times, stocks rallied over the next 12 months.
The average three-month-gain? About 7%. The average 12-month-gain? A very impressive 24%.
Historically, big drops in U.S. consumer sentiment have served as promising contrarian BUY indicators. They always precede massive stock market rallies, not crashes.
We don’t think this time will prove any different.
***So, where is Luke placing his chips today to take advantage of a rally?
Regular Digest readers already know the answer – top-tier hypergrowth technology companies.
Though Luke’s market approach usually involves tech stocks, there’s a recent market signal that he’s interpreting as especially bullish for tech right now. It involves the popular ARK Innovation ETF (ARKK).
ARKK contains about 36 tech stocks that serve as a proxy for hypergrowth tech stocks.
To give you a better sense of it, the fund’s top five holdings are Tesla, Teladoc, Roku, Zoom, and Coinbase.
ARKK has taken it on the chin ever since fears of a rising rate environment began to grip the market. Since its high in February 2021, it’s down 61%. But since mid-March, ARKK has staged an impressive rally, climbing as much as 35%.
Always a student of market history, Luke analyzed what has happened in the wake of such an ARKK breakout in the past:
The ARK fund is amid its biggest breakout ever.
Previous pops like this happened in March 2016, January 2019, April 2020 and July 2020.
Each one of those breakouts led to huge three-, six- and 12-month forward returns in hypergrowth tech stocks.
The only time the ARK Innovation ETF didn’t see huge returns following a jump like we’re seeing today was in December 2020. And that breakout was a melt-up on the heels of huge rally.
That’s the exact opposite situation we have today (a breakout on the heels of a big downtrend).
Overall, even including the December 2020 “head fake,” big short-term breakouts in hypergrowth tech stocks like we’re seeing today tend to produce, on average, 35% returns over the next three months, 56% returns over the next six months, and 75% returns over the next 12 months.
***Still nervous about putting new money to work in today’s market?
If so, it brings to mind one of my favorite investing quotes from Rob Arnott, founder of Research Affiliates:
In investing, what is comfortable is rarely profitable.
Of course, putting your money into the market when you’re feeling uncomfortable is incredibly difficult – even if the data suggest gains are coming.
So, what’s the answer?
Last week, we highlighted a powerful, mini e-book titled The Risk Vs Reward Manifesto from our CEO, Brian Hunt.
From the Manifesto:
The way most think about Risk Vs. Reward is ALL WRONG.
They spend all their time focusing on the wrong side of it the equation. Most people spend 100% of their time as an investor thinking about how much they can win… which is why they lose…
They don’t think for a second about how much they stand to lose if things don’t work out as planned or if the best-case scenario doesn’t play out.
On the other hand, the intelligent investor or trader – the pro – is always focused on how much money he could potentially lose on a stock, a private deal, a trade, a bond, or a piece of property.
He is always focused on risk.
The way you bring yourself to take action and invest even when your emotions are against it is by focusing on risk, as Brian just highlighted. But then you create a plan that mitigates the risk, giving you the confidence to take action.
Brian walks through five pillars of risk vs. reward investing that accomplishes this:
Asset allocation… Position-sizing… Stop-losses… Bargain-hunting… and Asymmetric bets.
This Manifesto content is highly-relevant, actionable wisdom that you can incorporate into your portfolio and market approach today.
So, want to ride a bullish wave in tech higher alongside Luke, but find yourself nervous about pulling the trigger?
Use The Risk Vs Reward Manifesto to create a tailormade trade plan that works for you and your specific investment situation.
You’ll clearly define your downside risk – accepting only what’s right for you. And that will enable you to be in the market, benefiting from what history suggests could be a monster surge over the coming 12 months.
In the meantime, keep your eyes on ARKK. If Luke is right, the coming months will bring some fireworks.
Have a good evening,
Jeff Remsburg
