When Tech Gives Way, These Stocks Are Set to Soar
Editor's note: Tech stocks' reign may be about to end...
As the bull market rages on, investors have poured money into the most innovative opportunities – pushing them to incredible heights while leaving "boring" investments in the dust. But True Wealth Systems editor Steve Sjuggerud says that trend might be on the verge of a turning point...
According to Steve, today's hot market looks a lot like it did two decades ago. And if the late-1990s "Melt Up" is any indicator, tech's incredible outperformance could soon be outpaced by another group of stocks.
In today's Masters Series, originally from the September issue of True Wealth Systems, Steve explains what recent hedge-fund activity can tell us about the bull market... compares the dot-com Melt Up to the one taking place today... and reveals the type of stocks that could save your portfolio when the good times end...
When Tech Gives Way, These Stocks Are Set to Soar
Niall O'Keeffe and Tio Charbaghi weren't satisfied working for the big dogs on Wall Street...
The two traders were working at Citadel during the pandemic. It's a massive hedge fund with $38 billion in assets under management. And it's as prestigious as hedge funds get. But that wasn't enough for them...
You see, the two traders wanted to run their own shop. So earlier this year, they left one of the best hedge funds on Wall Street to start their own.
O'Keeffe and Charbaghi raised $1.25 billion – the most of any fund so far in 2021. But on the first day of trading, they did something unexpected...
They closed the fund to new investors.
That's right... So much money poured in that within a day, they were already turning investors away.
Now, this story isn't unique to these two traders. Of course, they've got incredible pedigrees. But the story is much bigger.
Let me share what's going on – and what it could mean for investors in the coming months...
Today's hot market is sparking massive interest in hedge funds once again. But the pros are closing the doors to new investors as the "Melt Up" rages on...
According to Bloomberg, a record 1,144 hedge funds are turning away new money. So it's too late to invest with these pros in today's hot market... And that's in spite of the crazy fees you'd have to pay to do so.
For those who aren't familiar with hedge funds, they're expensive. A typical hedge fund charges a 2% upfront fee and takes 20% of the profits.
Before the pandemic, folks had been bailing on the old hedge-fund model because of the price tag. Some 11,600 hedge funds closed from 2008 to 2020. And most of the ones that survived had to cut fees to try to compete for new clients.
That's all changing this year, though... And it shows us how hot today's market really is.
A similar story played out in the late-1990s Melt Up. Andy Kessler and Fred Kittler were two hedge-fund guys who famously turned away $1 billion in a single week. That was in 1999... months before the dot-com peak.
The two were coming off incredible performance – they made 377% for investors that year. But with so much money sloshing around, they became cautious and started sending new investors away.
Today's market looks a lot like 1999... at least, based on what we see the investment pros doing. Hedge funds are turning away money in record numbers. And that huge demand means we're in the final stage of the Melt Up.
So what happens next?
Well, we can't know the exact timeline. But looking ahead, tech's massive outperformance will eventually give way to another group of stocks.
The gap between growth stocks like tech and "boring" value stocks is the widest it has ever been. The 1990s Melt Up saw the same thing play out... Tech stocks soared as new investors chased life-changing gains. And value stocks were left behind.
Nobody cared about the stodgy market standbys. They had solid fundamentals... They fit the model of good businesses that were available for cheap. But they didn't have flashy ideas – or the ability to soar overnight.
That's a major reason why people overlooked value stocks – like banks, insurers, and other boring companies – in 1999. They weren't going to reshape our future. It's much more exciting to get in on the ground floor of a revolutionary technology that will drive growth.
Then, shortly after growth had its day, value started to take off... Those who stayed in growth and ignored value stocks following 1999 took a hard hit.
We can't know when this will happen again. But we could be on the precipice of a similar shift in the market.
In short, the "blueprint" of the 1990s Melt Up has held true...
Tech stocks are leading the market higher. Investors are chasing big gains. And like I said, it has gotten to the point where hedge funds are turning new money away.
Following the late '90s playbook has worked out for investors, too. The same sectors that took off back then are soaring now...
I'm talking about tech stocks, semiconductors, and just about anything else that's exciting and high growth.
You want to own these growth sectors as long as the Melt Up continues. But the blueprint from last time around shows that this won't last forever.
Investors have left boring value stocks in the dust, just like they did in 1999. And just like back then, that trend is almost certain to reverse at some point.
Let me explain...
The gap between growth and value stocks spiked during the final inning of the dot-com Melt Up. You can see this in the chart below. It shows us the growth-to-value ratio of the market...
To get this measure, we simply divide the S&P 500 Growth Index by the S&P 500 Value Index. When the ratio is rising, it means growth stocks are crushing value. And that's exactly what happened as the 1990s Melt Up peaked. Take a look...
The dot-com era was all about growth. Many of the companies behind these stocks didn't even have real business models. But that didn't stop investors from bidding up shares in the hopes of making incredible gains.
That led to huge rallies in high-flying sectors during the dot-com boom. Growth stocks crushed value. But then, the ratio peaked in early 2000... right as the Melt Up was coming to a close.
This is how market cycles work. One part of the market will outperform for years. And then, just when investors think that outperformance will last forever, it flips.
From 2000 through 2008, the ratio turned in favor of value. Take a look...
The growth decade was over. The boring value stocks that were left behind in the late 1990s came roaring back.
This drove the ratio down for most of the 2000s. It went from an all-time high in 2000 to an all-time low in 2007.
That cycle wasn't going to last forever, though. Growth stocks would eventually outperform value again. That's what we've been seeing over the last decade or so.
From 2009 until now, growth has been leading the market. And the gap between growth and value is back at an all-time high. Check it out...
You can see that the growth-to-value ratio shifted into high gear in 2020. We are now near the ratio's all-time high going back more than 20 years.
The surge we're seeing today is eerily similar to what we saw in 1999... as the Melt Up was nearing its final peak.
We are likely close to another turning point in today's market. The ratio is near all-time highs, like it was in late 1999. And that means a snap back to value is certain.
We can't know exactly when that will happen... But we know the Melt Up won't last forever. And when it ends – and a Melt Down takes hold – value stocks could save your portfolio.
We're not there just yet. But this market cycle is inevitable. Don't forget that when the good times finally end.
Good investing,
Steve Sjuggerud
Editor's note: The end of the Melt Up is inevitable... and Steve says value stocks could save your portfolio whenever the Melt Down ultimately arrives. But that's not the only way you can prepare for the next downturn today...
Steve recently joined fellow Stansberry Research senior analysts Dan Ferris and Dr. David "Doc" Eifrig to talk about exactly where they think the market is headed in the weeks and months ahead – and what steps you should be taking with your money right now. If you missed this event, don't worry... You can still watch the full replay right here. (And just for tuning in, you'll get the name and ticker symbol of a company that one expert believes is the most dangerous stock in the world today.)