Did you see that? Did you see what happened in the stock market yesterday?
Stocks opened the day flat ahead of the Federal Reserve’s Summary of Economic Projections release and press conference. Then, once the news hit the tape, the stock market plunged, because the Fed sharply lifted its inflation expectations for 2021 and reeled in rate hike projections by a year.
Specifically, the Fed’s inflation expectations for 2021 rose from 2.4% in March, to 3.4% today, while core inflation expectations rose from 2.2% to 3.0%. Projections for the real unemployment rate did not move up, but real GDP growth forecasts did creep higher from 6.5% to 7.0%.
As a result, Fed members are standing pat on zero rate hikes in 2021 and 2022, but are now forecasting for two rate hikes in 2023 – whereas the prior forecast called for zero rate hikes until 2024.
The dovish Fed turned slightly hawkish.
In response, the 10-year Treasury yield jumped 8 basis points, while the stock market fell sharply into negative territory, led by rate-sensitive hypergrowth stocks.
Then it happened.
The big rebound – the V-shaped bounce-back – started by Federal Reserve Board Chair Jerome Powell’s press conference, in which Powell basically told the market: “We got your back.”
Long story short, Powell said that they still believe in the transitory inflation thesis and won’t do anything to change monetary policy anytime soon, but if and when they do, they will do so very gradually and very slowly to a place that will remain very accommodative.
In other words, Powell said “easy money” is here to stay for a lot longer.
So, the stock market rebounded, led by… you guessed it… hypergrowth stocks. By late afternoon trading, the Nasdaq had popped back into the green.
To most investors, it was wild trading action. But to us… well, let’s just say we’ve seen this rodeo before.
Fed meetings have been very important to the stock market over the past few years in a world where accommodative monetary policy has seemed out-of-step with healthy economic growth, thanks to persistently subdued inflation.
Investors know that rates, at some point, have to move higher, and if/when they do, it’ll be a major blow to the stock market, which is trading at an inflated valuation due to low rates.
That’s why on days the Fed meets and reports updated projections, the financial world watches, often on edge.
And the reaction is always the same.
Financial markets usually have a knee-jerk reaction to the new Dot Plot because it shows slightly more hawkish projections, and stocks fall off a cliff. Then, Powell takes the stage, calms the markets and beats the “easy money” drum, and stocks rebound with vigor.
This has happened so many times that we’ve lost count. By our recollection, it seems to happen nearly every time the Fed takes the stage these days.
As it turns out, this time was not different. You got the knee-jerk selloff to the shifted Dot Plot, and the swift recovery during the Powel presser.
The next time won’t be different. Nor will the time after that. Because here’s the thing: The Fed has the market’s back. The Fed has your back.
Let’s stop playing these games with Dot Plots and 2023 projections. They’re meaningless. At the end of the day, Jerome Powell and the U.S. Federal Reserve have – time and time again – shown unrelenting support for the U.S. stock market.
The last thing they want to do – and the last thing they will do – is upset financial markets.
They will keep monetary policy very accommodative until the economy absolutely needs some tightening to stop from runaway inflation, and when they do move, it will be very slow and very methodical. No sudden jumps. No shocks to the system. Telegraphed moves that are already priced into assets.
So don’t worry. Take a deep breath. Relax. And buy the dip in your favorite names, because within the next few weeks, they’ll bounce back with vigor.
But before you do, a warning: Not all stocks will rebound equally.
You see, accommodative monetary policy is broadly good for all stocks, but it is especially good for hypergrowth small-cap stocks whose valuations are rate-sensitive and whose growth trajectories are economically sensitive. In this sense, accommodative monetary policy provides hypergrowth small-cap stocks with two major tailwinds:
- Low rates, which help boost the valuation multiples.
- Healthy economic growth, which helps boost the underlying earnings growth trajectory.
Higher earnings plus higher multiples equals higher stock prices.
And that’s why I say with confidence that there has never been a better time to buy hypergrowth small-cap stocks than right now.
Fortunately for you, we’ve put together a list of more than 40 hypergrowth stocks that could score investors Amazon-like returns over the next few months and years.
These stocks include the world’s most exciting autonomous vehicle startup, a world-class “Digitainment” stock creating the building blocks of the metaverse, a company that we fully believe is a “Tesla-killer,” and many more.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s the theme of his premiere technology-focused service, Innovation Investor. To see Luke’s entire lineup of innovative cutting-edge stocks, become a subscriber of Innovation Investor today.