When Recession Fears Soar, Buy the Dip

Everyone is worried about a recession these days. But since that fear looms large, the stage is set for a massive market rally over the next 12 months.

tech stocks rally
Source: iQoncept / Shutterstock

I know it sounds weird, even counterintuitive. But just look at the following chart.

It graphs the Google Trends search interest for the terms “recession” (blue line) and “S&P 500” (orange line). You can see that spikes in blue — when everyone is Googling “recession” — correlate to dips in the market. And they lead to huge rallies over the subsequent few months. They’re great buying opportunities.

A graph depicting the correlation in Google Trends searches between "recession" and "S&P 500"

In other words, recession fears are a contrarian buying indicator for the stock market. Recession fears are reactionary, not predictive. And peak fear usually means peak sell-off — and a great buying opportunity.

Currently, we’re seeing that blue line trend sharply higher in a way we haven’t since March 2020, August 2019 or December 2018. Those big spikes in recession search interest correlated with a stock market sell-off. They happened awfully close to the market bottoming out and preceded big rallies over the subsequent few months.

History appears to be repeating itself today.

Sure, as I’m writing this, stocks are coming off a rough week. And they appear to be losing ground after a huge March comeback rally. But my analysis shows this is totally normal and expected. It actually underscores the medium-term bull thesis that the stock market is due for a big melt-up.

So… what should you be doing right now to navigate this uncertain market? Buy the dips. History proves that big gains lie ahead.

Here’s a deeper look.

The Yield Curve Inversion Indicator

As you probably know, the U.S. Treasury yield curve inverted two weeks ago, as the 10-year flipped below the 2-year. Such an inversion is considered a “recession indicator” because it has preceded every U.S. economic recession since the 1970s. Indeed, there’s only been one false-positive signal.

But as longtime readers of Hypergrowth Investing know, such yield curve inversions are notoriously premature in predicting recessions. Instead, what usually happens is that the yield curve inverts. And after, stocks rocket high over the next 12 to 24 months before eventually collapsing as a recession does emerge.

In other words, the cycle here is:

  1. Yield curve inverts.
  2. Stock market rallies big.
  3. Market drops as economy plunges into a recession.

Importantly, this pattern has never not been true.

Stocks behave in all sorts of ways immediately following a yield curve inversion. In 1988, they immediately melted up. In 1998, they sold off and then melted up. And in 2005, they chopped around and then melted up. But regardless of how stocks reacted in the immediate aftermath, they always proceeded to melt up over the following months.

A graph depicting the percent change in the Nasdaq following a yield curve inversion

We’re about two weeks into the 2022 yield curve inversion. The Nasdaq is off about 5% since then. Bears are taking these as cues that the market is ready to crash.

But in the context of previous inversions, this price action is totally normal and nothing to worry about. Stocks may fall over the next few weeks. They may chop or rally. It’s tough to say.

But history shows that this near-term price action does not matter. It will eventually resolve in stocks melting up in the back half of 2022 and into 2023.

Recession Fears Create a Great Chance to Buy the Dip

Historical data strongly implies that stocks will rally by at least 10% over the next 12 months. And it’ll likely be closer to 20% or more — regardless of where stocks go over the next few weeks.

In our flagship investment research advisory Innovation Investor, for example, we’re seeing some huge opportunities. And we think some of our stocks could double or triple over the next 12 months amid this market melt-up.

That means it’s time to go shopping for discounts. Today’s volatility is an opportunity.

Indeed, in financial markets, risk and reward are tightly correlated. The higher the risk, the higher the reward. The lower the risk, the lower the reward.

The key to being a good investor is to identify opportunities that optimize this risk-reward profile. Find opportunities with big reward potential but mitigated risk.

Today we’re seeing a very optimized risk-reward profile in tech stocks.

They were crushed in the first quarter based on a plethora of fears. The yield curve inverted. Russia invaded Ukraine. Inflation is running at decade-highs. The Federal Reserve is preparing to hike rates 10 or more times this year. And there are more Covid-19 lockdowns in China.

Indeed, earlier this year, the “table” was set with a multitude of risks, so to speak. And as it was being set, tech stocks got hammered.

That’s a perfect bullish set-up.

The Final Word

Tech stocks are fully priced for a lot of unwelcome news right now. But over the next 12 months, a some of those risks could be resolved. In fact, a few should — and likely will — be sorted out.

Folks are going to forget about the yield curve inversion soon. They always do. Meanwhile, the war in Europe seems to be localizing in eastern Ukraine and not spreading farther into the continent. Inflation should decelerate as oil prices are crashing. The Fed couldn’t sound any more hawkish at this point, so there’s room for them to pivot dovish in the summer. And amid huge citizen pushback, China may adjust its zero-Covid policy going forward.

Risks will be removed from the table over the next 12 months. As they do, history will repeat itself. And today’s beaten-up tech stocks will stage an enormous comeback.

Trust me. This is a rally you don’t want to miss.

Plug in to find out the best tech stocks to buy today for huge gains over the next year. I’ll even tell you my absolute favorite tech stock to buy right now for free.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/hypergrowthinvesting/2022/04/when-recession-fears-soar-buy-the-dip/.

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