A New Bull Market is Forming

The yield-curve inversion sparks debate … how to play it in your portfolio … the potential for meaningful federal legislative change on marijuana sparks a pop in stock prices

The recession-watch indicator we’ve been tracking for months – the “10-2 spread” – triggered on Tuesday.

If history repeats itself, this event suggests we’ll have a recession within the next two years.

However, not everyone is concerned.

For example, here’s Erin Browne, a fund manager at Pacific Investment Management:

There’s reason to believe that this time around, yield-curve inversion may not be as good of an indicator as it has been in the past, particularly given the enormous amount of quantitative easing undertaken by global central banks.

But such naysaying is just par-for-the-course, according to “Bond King” Jeffrey Gundlach, the CEO of DoubleLine Capital.

On Tuesday, he tweeted:

“Right on cue, the “It Doesn’t Matter This Time” white papers are coming out.

Don’t believe them.

So, which is it?

Well, let’s focus on what we know about a 10-2 yield-curve inversion.

The bad news: An inverted 10/2 curve has preceded the last eight recessions. If we go further back in time, the inversion has preceded 10 out of the last 13 recessions.

The good news: an inverted 10-2 yield curve doesn’t mean an immediate recession and implosion in the stock market.

In fact, if we take the 10-2 inversions from 1998, 2005, and 2019, there was an average of 21 months between the inversion and a recession.

Meanwhile, over those months, the S&P averaged a 14.7% gain.

Putting all this data together, a factually grounded conclusion is that we’ve now started a stopwatch that counts down to some economic pain…but in the meantime, there’s good money to be made with stocks.

But which stocks, exactly?

***Where there’s a new bull market forming today

Luke Lango is our hypergrowth expert and the editor behind Innovation Investor. This service focuses on smaller, cutting-edge technology companies that are changing our world…and potentially making lifechanging returns in the process.

From Luke’s recent issue of Daily Notes in Innovation Investor:

We do not believe this (recent surge in tech stocks) is a fluke. 

We believe this is the start of a new hypergrowth tech stock bull market…

Of particular relevance to our portfolios, we’ve seen our stocks absolutely surge over the past few weeks. 

Since March 14 — the day before the Federal Reserve increased interest rates — we have seen many of our stocks rise 30%, 40%, 50%, and even more…

As we’ve pointed out multiple times before, growth stocks historically tend to underperform ahead of a rate-hike cycle on fears of higher rates impacting valuations. But they then outperform once the rate-hike cycle gets underway, because those rate hikes slow the economy and make growth stocks relatively more valuable.

We believe history is repeating itself.

Growth stocks underperformed in the 12 months leading up to the current rate hike cycle. We strongly believe growth stocks will meaningfully outperform over the next 12 months, as the rate-hike cycle gets underway, especially since many growth stocks are dramatically undervalued at current levels.

***Luke called it – did you buy it?

Let’s get specific about these small innovative stocks.

Back on March 2nd, in Luke’s free newsletter, Hypergrowth Investing, he pulled back the curtain on one of his favorite long-term tech plays: Opendoor (OPEN).

The stock had just disappointed Wall Street even though it had just delivered a great earnings report. Describe strong numbers, Wall Street dinged Opendoor for its business strategy that involves becoming the “Amazon of Houses” (to read Luke’s entire analysis, click here).

Luke believed the selloff was a gross overreaction, resulting in this bold statement:

Throughout my investment career, I’ve seen a lot of irrational selloffs on Wall Street. But last week’s Opendoor selloff was unlike anything I’ve seen before.

So let me cut to the chase: I firmly believe buying the dip in Opendoor stock today could 20X your money over the next few years.

Since the low point of that selloff, Opendoor stock has surged as high as 52% (it’s pulled back to roughly 40% up as I write).

And again, this move has taken place is in less than three weeks.

Bottom-line, yes, we need to take the 10-2 yield-curve inversion seriously.

But for now, there’s money to be made in this tech bull market.

To get Luke’s entire list of top tech plays as an Innovation Investor subscriber, click here.

***Meanwhile, yesterday, the House Rules Committee held a hearing on the Marijuana Opportunity Reinvestment and Expungement Act (the MORE Act)

If made into law, the MORE Act would decriminalize cannabis at the federal level.

Yesterday’s hearing resulted in the committee formally advancing the bill to the floor. It’s expected to be voted on by the full House of Representatives tomorrow.

If you’re having déjà vu, there’s a reason:

The MORE Act passed the Democratic-controlled House in December 2020 in a vote that was largely divided along party lines. It then died in the Senate which, at that time, had a Republican majority.

It’s expected to pass the House vote again. As to the Senate, even though Democrats now have a narrow majority in the Senate, analysts aren’t certain the MORE Act will overcome a potential filibuster.

Nevertheless, the news has resulted in a faint sign of life for marijuana stocks.

Below, we look at the popular marijuana ETF, “MJ.” It’s the Alternate Harvest ETF. Since this ETF contains dozens of stocks that are engaged in the legal cultivation, production, marketing or distribution of cannabis products, it’s a loose proxy for how the broader marijuana industry is performing.

As you can see, MJ surged in the wake of the pandemic as money flooded every corner of the stock market. It even enjoyed a fleeting moment of manic buying in early 2021 as Reddit investors temporarily set their sites on the marijuana sector.

Since then, it’s been a bloodbath.

But as you can see in the chart, MJ has bounced hard in the second half of March. That recent uptick is a gain of 29%.

***So, is this the beginning of a sustained move north for marijuana stocks?

Never say “never,” but it’s unlikely.

Long-term, what drives higher stock prices are healthy, increasing earnings.

Until marijuana is legalized at the federal level, or at least decriminalized, the sector will only be capable of limited growth. Since the MORE Act is unlikely to become law (at least, this time around), we shouldn’t bank on this latest push having a sustained impact on prices.

Now, the hearings and votes will be beneficial for the marijuana sector since they will keep legalization in the spotlight. But the long-awaited legalization is unlikely at this point.

That said, given the direction popular culture is headed, there are good odds that we’ll see marijuana decriminalization (or full legalization) in the coming years.

Meanwhile, marijuana stocks have gotten so destroyed that the trade has been highly de-risked. That’s not to say prices can’t go lower (especially after this recent pop), but buying at today’s prices is likely to be a long-term moneymaker for patient investors.

We’ll keep you updated on any legislative breakthroughs here in the Digest.

***Finally, another month, another high inflation reading

Before we wrap up, news this morning is that the core personal consumption expenditures price index just notched a 40-year high.

From MarketWatch:

The Federal Reserve’s favorite inflation calculator rose a sharp 0.6% in February and kept the increase over the past year at a 40-year high, explaining why the central bank plans to move faster to raise U.S. interest rates.

The so-called personal consumption price index climbed to 6.4% in the 12 months ended in February, up from 6.2% in the prior month, the government said Thursday.

That’s the steepest increase since January 1982.

Translation – the odds of a 50-basis-point rate hike at the Fed’s May meeting remain high.

As I write, the CME Group’s FedWatch Tool pegs that probability at 71%.

As we’ve been saying for a long time here in the Digest, make sure your portfolio is ready for higher interest rates. They’re coming.

Have a good evening,

Jeff Remsburg