Something very interesting happened in the stock market yesterday… something that most folks missed or didn’t pay much attention to… but that could help you score 100% returns in 2022. Here’s what happened: Growth stocks and the 10-year Treasury yield both rose.
I bet a lot of you are saying: So what!? And I get that response. But understanding that this did happen – and understanding why it happened – could help you find the stocks best positioned to double next year.
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As you probably know, growth stocks and the 10-year Treasury yield have been strongly negatively correlated in 2021. Reasonably so.
Remember your Finance 101 class. As yields go up, discount rates go up, and the net present value of a company’s future cash flows goes down.
Growth stocks (unlike value stocks) rely heavily on those future cash flows to warrant their current valuations.
So, throughout 2021, when yields have gone up, growth stocks have tended to retreat, and vice versa.
But not yesterday. Yesterday, growth stocks rallied in a big way alongside the 10-year Treasury yield pushing higher toward 1.7%.
Of note, this is not a new phenomenon. In October, growth stocks and the 10-year Treasury yield have actually been positively correlated. Both have gone up.
Because, as I’ve stated before in these very issues, the negative correlation between yields and growth stocks was never going to last – it’s a temporary phenomenon.
Historically, there is no significant correlation between the two. In fact, during the last rate hike cycle from 2016 to 2019 when yields did move higher, growth stocks outperformed – but only after temporary underperformance in 2016.
Under the hood, what’s happening is that – since we’ve been in a multi-decade bond bull market where yields have trended lower since 1980 – every time we enter a period of rising yields or rate hikes due to escalating inflation, investors freak-out that this means the end of “lower-for-longer” with respect to yields, and they sell yield-sensitive growth stocks.
But they’re never right.
As things play out, the secular deflationary forces of technology and globalization – digital technology platforms like Amazon, Netflix, and Facebook make everything faster, cheaper, and more convenient, while the outsourcing of labor across the globe lowers production costs – overwhelm any and all inflationary pressures, whether they be demand-driven or supply-driven (as is the case today).
The Fed hikes a few times. Then stops. Yields stabilize. And they never break out of their 40-year downtrend. They, indeed, remain lower for longer.
So… what do investors do? They rush back into growth stocks, and after a temporary “rough patch,” those stocks soar.
The last time this happened was in 2016-17.
In 2016, the Vanguard Growth Index Fund ETF (VUG) rose just 6% amid rising yields, rising inflation, and rate hike concerns. In 2017 – as those fears faded – the exchange-traded fund (ETF) rallied nearly 30%.
Of note, the more growth-focused and early-stage the stock, the bigger the rebound rally. Cathie Wood’s early-stage growth fund – ARK Innovation ETF (ARKK) – dropped 2% in 2016. It popped about 90% in 2017.
I believe that we are in the early innings of a similar reversal. That is, 2021 feels a lot like 2016, and I think 2022 could look a lot like 2017, implying a big growth stock breakout next year – and a huge breakout for early-stage growth stocks.
The last time this happened, early-stage growth stocks basically doubled in a year. Could the same happen this time around? I think so.
Are you interested in doubling your money in 2022?
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More than that, we invest in the best-of-the-best in the early-stage growth world – disruptive tech companies that have game-changing technologies, are led by world-class teams, and which have the potential to reshape our professional and personal lives over the next few years.
These aren’t just stocks that could double next year. They are stocks that could soar 5X… 7X… even 10X or more in the long run.
Sound like the type of stocks you want to invest in?
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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.