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Growth Stocks Are Soaring as a Recession Looms Large

  • Investors will increasingly pivot into growth stocks that can power through an economic slowdown.
  • The 5-year Treasury yield dropped below the 2-year yesterday for the first time this cycle.
  • Since yields are plunging, we think this recession-driven selloff is at that critical tipping point where growth stocks start to surge.

Like it or not, a recession is coming. And Wall Street is finally preparing.

Yesterday, bond yields and commodity prices plunged while stocks struggled. That’s exactly what you’d expect as investors prep for a recession over the next 12 months.

But guess what else happened? Investors piled into growth stocks. The signature portfolio in our Innovation Investor investment research advisory comprises the top 10 growth stocks to buy right now. And it soared more than 6% yesterday!

Daily percent return

This is also typical “recession prep” trading action.

Usually, when a recession hits, investors seek growth stocks that have so much momentum, they’ll grow through the storm. Not to mention, those same growth stocks also benefit from the lower bond yields that typically accompany recessions.

Therefore, yesterday’s huge move higher in growth stocks isn’t surprising.

It’s also just the beginning of something much, much bigger…

The reality is that the U.S. economy is spiraling into a recession. Wall Street has long neglected this. Finally, investors are waking up. Over the next six months, investors will prepare for and navigate through a recession. And they’ll increasingly pivot into growth stocks that power through an economic slowdown.

Net-net — growth stocks are in the early stages of a big multi-month breakout.

And we have the best growth stocks to buy for this breakout.

Here’s a deeper look.

Recession Incoming

One of the best recession signals in the markets is a yield curve inversion.

In short, the U.S. government issues a bunch of “bonds” with different maturity dates. Typically, the Treasuries with shorter maturity dates have lower yields than those with longer maturities. That indicates that investors require more return to hold a certain security for a longer period.

However, when investors get nervous about a recession, they don’t want to hold short-term bonds. Their confidence in the near-term outlook for the economy is reduced. So, they sell short-term bonds and buy long-term ones instead. This pushes short yields higher and long yields lower. When this dynamic becomes extreme, long yields fall below short yields. This is called a yield curve inversion.

Yield curve inversions are rare. They only happen about once a decade. But when they do happen, they’re almost always followed by a recession. 

Yesterday, the yield curve inverted as the 10-year Treasury yield dropped below the 2-year. Some of you may recall that this 10-2 inversion happened once before in 2022. It did. But what we haven’t seen so far in 2022 — and, indeed, haven’t seen since the months before the COVID-driven recession and before that, 2007 — is a “5-2 inversion.” That’s when the 5-year Treasury yield drops below 2-year.

That happened yesterday for the first time this cycle. Such an inversion is pretty much a surefire recession indicator.

Recession incoming - bloomberg chart

In other words, the bond market is the biggest market in the world. And it’s flashing its biggest warning signal yet that a recession’s on the horizon.

We’d be fools not to listen.

That’s why Wall Street played “recession prep” so strongly yesterday. Yields plunged. Commodities crashed. Stocks struggled.

And growth stocks surged — a trend we expect to continue.

Growth Stocks Thrive in Recessions

Many investors think that recessions kill all stocks. That’s not true. Recessions impact all stocks differently. And when it comes to growth stocks, recessions can actually be beneficial.

The reasoning is two-fold.

First, recessions create a scarcity of earnings growth. This pushes investors to allocate funds into the stocks that can still create strong earnings growth despite a no-growth environment. (Those are secular growth stocks).

Second, recessions push bond yields lower. And when bond yields go lower, the future cash flows upon which growth stocks are valued become worth more today. (That’s because bond yields are used as a proxy for the discount rate on those cash flows).

In other words, investors pile into growth stocks during recessions because they can keep growing. And they benefit from the lower yields that accompany recessions.

Makes sense, right?

This is more than just theory. Look at the last “real” recession the U.S. faced in 2008.

During that downturn, there was a five-month stretch at the end of the market’s selloff where the S&P 500 and Dow Jones both dropped about 10%. Yet growth stocks like Amazon (Nasdaq:AMZN), Netflix (Nasdaq:NFLX) and Booking (Nasdaq:BKNG) all rose more than 50%.

S&P 500 level change

It was the same with the recession before that. In 2001-02, there was a year-long stretch where the stock market dropped more than 20% as the economy’s growth slowed. Yet, over that same period, growth stocks like Amazon rose nearly 150%!

S&P 500 level change

In every recession-driven stock market selloff, there comes a point where investors start piling into growth stocks to play defense.

We think we’re at that point today.

Usually, it happens when yields start to plunge. In the early 2000s, yields took a dive in mid-2001. And that’s when growth stocks started to soar as the rest of the market struggled. In 2008, yields dropped in late 2008, and growth stocks began to roar as the rest of the market slumped.

Today, yields are plunging. The 10-year was 3.5% just a week ago. Now it’s at 2.8%.

Yields are plunging. And as such, we think this recession-driven selloff is at that critical tipping point where growth stocks start to surge.

The Final Word on Growth Stocks

History doesn’t repeat – but it does rhyme.

Every time a recession hits the stock market, the cycle is simple:

  1. Recession fears emerge. Stocks and bonds drop as investors sell everything.
  2. Recession fears are confirmed, leading investors to rush into bonds for safety. Yields drop.
  3. As yields drop, growth stocks start to rise and even surge, but the rest of the market drops.
  4. The recession ends, and the whole market rebounds.

Right now, we are between steps two and three. Recession fears have been all but confirmed. Investors are rushing into bonds. Yields are plunging. And growth stocks are starting to rise from the ashes.

What comes next? A mega-rally in growth stocks… while the rest of the market flops.

That’s why I recently put together an exclusive presentation about what may be the best growth stock to buy today.

You see, there’s this company… you may have heard of it. It’s called Apple (Nasdaq:AAPL)… and they make these wonder gadgets called iPhones that everyone owns these days.

Heard of them?

Well, reportedly, Apple is about to a launch a new tech product that could be bigger than the iPhone. In fact, it could be bigger than the iPhone, Mac, iPad, iPod, and Apple Watch put together.

And the stock I’m talking about is a tiny $3 stock that my analysis suggests is about to be the supplier of the most mission-critical piece of technology for Apple’s next big product launch.

It’s a growth stock that could absolutely surge over the next few years and turn early investors into millionaires.

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/2022/07/growth-stocks-are-soaring-as-a-recession-looms-large/.

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