Why Luke Lango is buying tech stocks … historical returns following a Fed pause … what history tells us about the recent market weakness … which sectors are poised for outperformance

“It’s time to buy tech stocks.”

That’s the clear-cut action step from our hypergrowth expert Luke Lango.

Yes, we’re likely not finished with banking chaos… sure, the strength that propelled the market higher at the beginning of the year has slowed… and no, we’re not out-of-the-woods when it comes to a potential recession…

But Luke believes we’re standing on the cusp of 30% gains from select technology stocks over the next 12 months.

Luke’s analysis isn’t feelings-based; rather, he grounds his research in historical market data. And the data are telling him it’s time to buy top-tier tech stocks.

There’s one big reason behind this…

The Fed “pause” that appears to have finally arrived.

Don’t fight the Fed

A study of historical markets shows that trying to make money betting against the Fed is a daunting challenge.

When the Fed wants to tighten the economy through raising rates, stocks tend to react poorly. When the Fed wants to goose the economy through cutting rates, stocks tend to react positively.

While it’s possible to make money with an investment thesis that runs contra to what the Fed is doing, the gains come far easier when you swim with Fed currents, not against them. 

Since March 2022, the Fed has hiked rates 10 consecutive times. It’s been perhaps the most aggressive and rapid rate-hiking campaign ever.

This has not been a friendly market environment, to say the least.

But for months now, Luke has been pointing toward the eventual “pause” from the Fed – the point when the ratcheting-up of interest-rates finally stops, and the focus shifts to rate cuts.

It appears we’ve finally reached that point.

Here’s Luke:

[On Wednesday], the Fed hiked rates by 25 basis points, continuing the trend it established in December 2022. 

However, in the press release that announced the rate hike, the Fed omitted certain words and phrases that were in every rate-hike press release since March 2022. They served to signal to the market that more rate hikes were coming. 

By omitting them from this month’s release, the Fed is implicitly signaling that no more rate hikes are coming. 

In fact, Fed Board Chair Jerome Powell confirmed as much in his press conference yesterday. He explicitly said that the omission of these phrases was “meaningful.” 

Take from that what you will. To me, the implication is obvious. 

The Federal Reserve is done with rate hikes.

What history tells us about stock market returns and a Fed pause

Facts over feelings.

Investors that maintain a fact-based market approach tend to generate far better results than investors who rely on feelings and hunches to dictate their  decisions.

While today’s market hasn’t felt resoundingly bullish in recent weeks, what are the historical facts related to returns after Fed interest-rate pauses? Especially as they relate to technology stocks.

Let’s jump to Luke’s Daily Notes from Innovation Investor:

We’re going to look at the most important chart in the stock market right now. 

With inflation crashing, the labor market cracking, and financial contagion fears spreading, a Fed pause by June looks inevitable. 

We have consistently emphasized buying all dips in the stock market ahead of this pause, and this is why. This chart graphs the trajectory of the Nasdaq Composite in the 12 months after each Fed pause going back to 1980 (excluding 2000 for obvious valuation discrepancy purposes). 

Whenever the Fed pauses a rate-hike cycle, tech stocks tend to rally big. 

Average 12-month forward returns in tech stocks after a Fed pause? About 26%. Average peak returns are above 30%. 

Either this time is different – spoiler alert: it’s not – or tech stocks are primed for a huge rally into summer 2024 thanks to the incoming Fed pause.

But does the market’s wobbly performance on Wednesday and Thursday suggest “this time is different”?

Yesterday, MarketWatch published interesting research from Kevin Muir of the trading shop Macro Tourist.

Muir evaluated market data between 1984 and 2018, studying total returns starting from the day of a final Fed rate increase, showing subsequent average returns.

Here’s what Muir found about market weakness in the immediate days after a final Fed hike:

On average, on the first day after the last hike, stock markets decline. The next day it gets worse. And on the third day, it declines a little more.

According to Muir, on the fourth day is when markets find support (based on today’s bullishness, it appears we’re reaching this point early). And two weeks later, they’re showing gains.

His research finds that within 90 days of a Fed pause, all the major stock market indices show gains. And which index leads the pack?

You guessed it – the tech-heavy Nasdaq 100, with an average return of 12.17%.

Muir’s research than evaluated S&P sector returns at 90-days out following a Fed pause.

Yet again, tech wins the day, posting average sector returns of 14.61%.

The second-place sector is rather interesting – it’s financials at 12.18%.

Achieving this average return this time around feels a bit like a coin-flip. On one hand, if the regional bank contagion continues to spread, it’s unlikely we’ll see anything even remotely approaching 12% sector gains in the next 90 days.

On the other hand, if investors feel the sector has stabilized and the selloff is overdone, we could be in for major bargain hunting that sends prices soaring (case in point, Western Alliance is up 51% today, as I write).

Finally, what’s the third best-performing sector following a Fed rate-pause, as reported by Muir?

Real estate, at 10.4%.

That’s also a huge wildcard in today’s macroeconomic climate. Here’s Muir’s take on these two sectors, which matches our own:

Looking at the next winners [beyond tech], we have financials and real estate.

Holy smokes, talk about a scary duo to own right now – but maybe that’s why they might work?

The sentiment in these two sectors is so downtrodden, we could see a massive short covering rally.

The coming tech rally

As we wrap up, let’s circle back to “facts versus feelings.”

One of my favorite investing quotes comes from Rob Arnott, founder of the investment shop Research Affiliates:

In investing, what is comfortable is rarely profitable.

I would not characterize today’s market environment as “comfortable.” But that’s where historical facts come into play.

With that in mind, let’s return to Luke’s simple roadmap to take us out:

One, the Fed just signaled it will pause its rate-hike campaign next month. 

Two, since 1980, every single “Fed Pause” has sparked a stock market rally. 

Three, in those “Fed Pause” rallies, tech stocks tend to be the biggest winners, posting average returns of about 30% in a year. 

The implication? It’s time to buy tech stocks.

I see a big tech-driven stock market rally just around the corner. I also believe certain tech stocks are going to soar 100%-plus in that rally. 

Have a good evening,

Jeff Remsburg