Welcome to Outlier Insights
Jason Bodner here, with a new project to share with my readers. It’s a new publication we’re calling Outlier Insights.
In my 14+ years on Wall Street, I learned many of the hidden ins and outs of the financial world. Many of these operations are invisible to us if we haven’t seen behind the curtain.
That’s why, these days, I spend my time helping regular investors spot opportunities in the markets. My goal is to draw back that curtain for my readers.
Yet the world moves fast these days. And I’ve been searching for how to communicate regularly about many of the events that are happening on a daily or weekly basis.
Is the news media telling the whole truth? Should we be worried about the recent market action? Is there a hidden opportunity in a particular sector? Are future implications of a theme being overlooked?
These are the kinds of topics that I want to share with investors. I believe these insights will make us better informed for making great investments.
I’d love to hear readers thoughts about this project – you can write to me at [email protected]. And in the meantime, I hope you enjoy these insights as much as I’ll enjoy bringing them to you.
In times like these, investors want to know what to do with their money.
The stock market is brutal right now.
There are many flavors of fear contributing: anxiety over interest rates, inflation, and war in Ukraine… the threat of nukes… China’s COVID lockdowns… supply chain issues… and the risk of economic slowdown.
The economic outlook is incredibly murky at best.
And if there’s one thing investors hate, it’s uncertainty.
And it’s hard to be certain about anything right now.
But today, I’ll show one spot that I am certain will reward you in the future, and I’ll give you a clue on timing as well.
Our One Near Certainty
First and foremost, the investing environment has flip-flopped from what was reliable over the past decade or so.
Growth and tech stocks are severely lagging, while stable Mabel, dividend-paying stocks are shining.
And we see that in the tech-loaded Nasdaq and increasingly tech-heavy S&P 500.
As I write this, here’s how the main indexes have performed year-to-date:
DJ 30 Industrials Average
As we can see, each of these indexes has been hurting, with the Nasdaq Composite taking the most heat.
But I’ll let you in on a secret…
Growth isn’t dead; it’s just out of favor for a while.
The engine of a thriving economy is economic growth, and the fuel for economic growth comes directly from American businesses.
And there is no better place to invest long term than in big growth areas like technology. It’s a near certainty that growth stocks will resume their ascent.
Why? Well, ask yourself some questions about five years from now:
Will you be less reliant on Google Assistant, Siri, or Alexa?
Will you be ditching Netflix, Hulu, or Disney+ in favor of cable tv?
Will our computers be less powerful?
Will our networks become slower?
Will our communication needs wane?
Will we need less technology for our work?
The answer, of course, is “No.”
As for when, that’s the key question…
When Will Growth Recover?
If the Fed engineers their economic “soft landing,” we should be fine.
Assuming growth slows down just enough to cool off this vicious inflation, then the Fed can hike rates less aggressively and hopefully avoid a recession. If that happens, corporate earnings will keep mounting and stocks will run higher.
I believe the Fed can achieve an economic soft-landing by the end of this year. After decades of accommodative policy, I don’t think the Fed will shove us into a hard recession or, worse yet, a depression.
So far, that seems to be holding true. We saw a 25-basis point hike to start the year rather than the rumored 50 basis points… And last week, the Fed decided on a 50-basis point hike compared to the much-feared 75 basis points.
Yet the truth is, even if we have a much rougher runway ahead, growth will still power us forward. Growth will still lead us out, as it did after the Great Depression.
And it’s a much better option than the alternatives. Holding cash, for example, is a literal waste with the inflation rate at 8%.
Additionally, since November, some tech stocks have fallen 50–80%… There are deals to be had!
Yet while buying growth is a great three to five year investment, the problem is investors find it hard to sit through the current floundering.
So let me show you one way to know when growth stocks finally bottom…
Hitting the Bottom
To figure out when growth will hit the bottom, we can look at the connection between growth stocks and the two-year Treasury yield.
That’s because when traders want to know where the Fed funds rate is going, they tend to look at the two-year Treasury yield.
Right now, markets are expecting aggressive Fed tightening, so the two-year yield has spiked.
That has pressured growth stocks.
Using Invesco QQQ Trust Series 1 (QQQ) as a proxy for growth, we can see what that looks like:
Growth and tech stocks won’t likely hit a low until that two-year yield starts easing off.
That’s an indication that the tightening will stabilize and there’s less fear of recession. So when that red line starts falling, that’s a great indication the market sees clearer skies ahead.
Yet for now, the future still is hard to see.
This market volatility could continue, especially if we don’t get a handle on inflation. Many U.S. companies are already guiding for lower earnings and profits ahead, but much of that is already priced into the stock market sag we see.
So what should we do with our money in a time like this?
The Best Way to Wait Out the Storm
Now, I’m an experienced investor and hold a lot of growth stocks.
I am prepared both psychologically and emotionally for a bumpy and uncomfortable ride. That’s because I know on the other side, when it comes, I will be holding great companies that will power our future.
The tradeoff is… I must sit through a rough time now.
Yet I know not all investors are comfortable holding tight through these kinds of sharp pullbacks.
So for investors who are wondering what to do until we see the all-clear sign for growth and tech stock buying, I have some suggestions:
Don’t hold cash. If inflation rages on at 8% per year, we’re losing 8% buying power on our cash per year. Heaven forbid, but if this drawdown lasts three years, we just lost 24%.
Buying bonds is still a money-losing proposition with rates where they are. For example, if we put our cash in a 10-year government bond, we’d be a net loser. Right now, it is yielding around 3%. That’s better than cash, but with 8% inflation, we will still lose about 5% per year.
I recommend buying lower volatility dividend stocks. There are plenty of dividend-themed ETFs that wrap up a basket of stocks to make it easy to get exposure. The most well-known is the iShares Select Dividend ETF (DVY).
Personally, I like the iShares Core High Dividend ETF (HDV), as it yields 3.23% (better than bonds) and has capital appreciation potential too. In fact, it is up 5.5% year-to-date. That, with the dividend yield, is effectively enough to fight inflation and then some. And it’s certainly way better than watching your cash rot in the corner.
That’s my playbook for how to navigate this rough time. A dividend appreciation ETF can help us side-step some potential volatility and counteract the effects on inflation on our hard-earned money until the growth uptrend starts to resume.
Either way, rest assured: this won’t last forever.
And when the sun finally parts the storm clouds, the warmth will feel amazing… especially for growth and tech stocks.
Editor, Outlier Insights
P.S. I hope you enjoyed our inaugural issue of Outlier Insights. I’d love to hear what readers think. Do you agree about the future of growth? Also, are there topics you’d like to see addressed in a future issue? Send in your thoughts to [email protected].