Yesterday was a landmark day for the stock market — for tech stocks and for us. The Dow Jones ripped off a 500-point gain, while the tech-heavy Nasdaq popped to the tune of 4%. Better yet, our Innovation Investor model portfolio rose nearly 10%! And it all happened because U.S. Federal Reserve Board Chair Jerome Powell and the Fed yet again saved the stock market from the brink of collapse.
Talk about a day…
Interestingly enough, though, Powell and company actually issued a hawkish policy update yesterday. The Fed’s voting members reduced their 2022 GDP growth guide from 4% to 2.8%, hiked their inflation guide from 2.6% to 4.3%, and raised the number of rate hike projections in 2022 from three to seven.
That’s a pretty hawkish update. A hawkish update like that was supposed to tank the stock market. Yet, stocks surged.
Because the Fed did something much more important than being dovish — they provided certainty to a spooked market.
The Fed: Injecting Policy Certainty
Let’s get one thing clear: Stocks haven’t been falling because the Fed is going to hike rates. They’ve been falling because of uncertainty regarding the go-forward path of monetary policy.
The market can deal with rate hikes. Indeed, during previous rate hike cycles, the stock market performed admirably. Over the past 12 rate hike cycles dating back to the 1950s, the S&P 500 has risen at an average annualized rate of 9.4%.
So, I repeat: The stock market can handle Fed rate hikes.
But what the market cannot handle is uncertainty, and Fed policy has been marked by substantial uncertainty over the past few months. That is, market participants have had no concrete idea as to how the Fed was going to deal with monetary policy against the backdrop of slowing economic growth, a war in Europe, Covid-19 lockdowns in China, and a decade’s-high inflation problem that will likely only get worse.
Against the backdrop of that uncertainty, stocks have struggled.
Yesterday, though, the Fed did something remarkable. They replaced that uncertainty with certainty. Yesterday’s statement made the Fed’s policy stance abundantly clear: So long as inflation remains red-hot, they’re going to fight it with rate hike after rate hike.
Sure, that’s hawkish. But it’s also a certainty. And that’s all the market needed.
The proverbial band-aid has been ripped off. Now that we know what the Fed is going to do, the market can benchmark valuations against that policy path and stocks can move higher on the back of positive earnings growth.
Fortunately, the market got so bearish heading into this announcement that valuations were benchmarked to a super-hawkish Fed and discounted due to uncertainty. Now, though, we only have a regularly hawkish Fed and the uncertainty is gone, so valuation multiples can and will likely move higher.
The result? A near-10% pop across our entire portfolio in a day.
Not Out of the Woods Yet
To be clear, this doesn’t mean we are out of the woods just yet, and that’s because the Fed has become reactive — not proactive — in the current environment.
That is, the Fed isn’t acting proactively to stop inflation from becoming a problem. They are reacting to the fact that inflation is already a big problem.
In other words, the “leading indicator” here, so to speak, isn’t the Fed. They’re a lagging indicator. The leading indicator, rather, is inflation. Want to know what the Fed is going to do next? Look at the inflation trends.
The big drivers of inflation trends today are the Russo-Ukrainian War and Covid-19 lockdowns in China. We liked what we saw yesterday out of those two situations. Diplomacy talks between Russia and Ukraine appear to be making some progress, in the first-ever sign that tensions in Europe may be deescalating. Meanwhile, Foxconn has restarted partial production at a plant in Shenzhen, China that it had to previously shut down due to Covid-19 restrictions.
Things are progressing in the right direction on the inflation front. That is highlighted by the recent drop in commodity prices.
But we are far from those issues being resolved and, therefore, we still think there’s more volatility on the horizon for the stock market.
Having said that, with the Fed re-injecting policy certainty into the equation, geopolitical developments trending in the right direction, commodity prices falling, and stocks rebounding, we do think that the pieces are in place for this ugly market sell-off to soon come to close.
If it does, a certain group of stocks is positioned to absolutely soar. We own those stocks in our Innovation Investor model portfolio. That entire portfolio was up almost 10% yesterday, and we think there are more gains to come.
The Final Word
Wall Street hates uncertainty. Over the past few months, Fed policy has been characterized by immense uncertainty. But yesterday, Powell and company cleared things up — and unsurprisingly, stocks soared in response.
We don’t think this rally is a fluke.
Instead, we believe this could be the beginning of an enormous breakout in hypergrowth tech stocks.
How big? Our models indicate many beaten-up tech stocks could soar 5X, 10X, 20X, or even more over the next five to 10 years.
You don’t see that sort of upside potential every day.
In fact, you only get the opportunity to invest in stocks with that sort of upside potential about once a decade.
And right now — this very moment — you have that opportunity.
So… what’re you waiting for? Seize the moment! Click here and learn how to capitalize on today’s enormous opportunity in tech stocks.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.