Anxious Over the Yield Plunge? There Are Still Great Stocks.

When it comes to the U.S. bond market, small moves are the norm.

BUY spelled out on a computer keyboard representing stocks to buy

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It’s a very liquid market, with a lot of risk-free investors who like to park their money in U.S. bonds for their lack of volatility. That’s why U.S. Treasury yields normally move just one to two basis points up or down on a single day.

But yesterday, the benchmark 10-year Treasury yield dropped as much as eight basis points in what was a very violent move downward for U.S. Treasury yields. And it comes on the heels of what has been a big 60-basis-point plunge in the 10-year Treasury yield since late March.

Bond market investors are looking at that action and going, “Wow!”

How to Approach the Yield

Now, as many of you know, Treasury yields are a proxy for inflation and economic growth. They move higher when investors are bullish on inflation and economic growth. They move lower when investors are bearish on inflation and economic growth.

So… what’s going on here? Why are Treasury yields plunging? After all, isn’t the U.S. economy on fire right now? And, most importantly, what does it mean for the stock market?

Well, as I have discussed many times with longtime readers, the red-hot U.S. economic recovery is quickly losing steam.

We received further evidence of this yesterday, as the Institute for Supply Management’s July Manufacturing Purchasing Managers’ Index (PMI) registered at 59.5%, below expectations for a 60.8% reading and down from June’s 60.6% reading. This continues what has been a string of disappointing economic data reports dating back to mid-May, the sum of which paint a picture of a naturally slowing economic recovery on the heels of pent-up consumer demand getting exhausted.

But this slowdown may just be getting started… and that’s thanks to the recent resurgence of Covid-19 across the United States.

With case counts now rising in every state and some counties re-instituting mask mandates, the pandemic is once again on the minds of most Americans. The concern is that the pandemic fears and hesitancies could adversely impact consumer behavior and activity.

The Fed is monitoring and acknowledging this risk. Minneapolis Fed President Neel Kashkari recently warned: “… if people are nervous about the Delta variant, that could slow some of the labor market recovery and therefore be a drag on our economic recovery.

Wall Street sees the writing on the wall.

The U.S. economic recovery is naturally maturing and slowing, and this slowdown will be exacerbated by a Covid-19 resurgence in the fall (which will likely pick up in the winter because illnesses simply spread faster in colder weather).

In the back-half of 2021 and likely into 2022, then, the U.S. economy will be characterized by slow growth.

The bond market is pricing this in by sending yields lower. And the stock market is pricing this in by sending growth stocks higher.

You see… growth stocks are the big winners on Wall Street when the U.S. economy slows.

That’s for two reasons:

  1. When the economy slows, companies reliant on a strong economy stop growing, while companies with secular drivers keep growing. The result is that corporate earnings growth – which, today, is quite equitable, because every company is growing – will concentrate in certain hypergrowth sectors of the economy. Investors will pour money into those hypergrowth sectors because they will be the only sectors growing.
  2. Also when the economy slows, yields drop, which we’re seeing right now. This drop in yields provides a valuation boost to hypergrowth stocks by inflating the present value of their future cash flows.

In effect, then, the continuing plunge in Treasury yields is hyper-bullish for hypergrowth stocks.

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Because I am very confident that the hypergrowth stock picks I’m going to give you, every single day, are the exact type of stocks that will surge over the next 12 months – these are the very stocks that will turn into the stock market’s biggest winners as Treasury yields continue to plunge amid a slowing economic recovery.

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

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