I think we’re finally at the start of a great stock market rotation…
And there’s great opportunity to be had…
The sharp minds at the hedge fund Crescat Capital agree with me.
Crescat has officially dubbed what it sees coming as the “Great Rotation.”
I pay attention to the fund because it’s put up a multidecade run of enviable investment performance.
During this Great Rotation, money will begin to flow out of megacap technology companies and into other areas of the market.
We’ve all watched, and in many cases benefited, as easy money policy from central bankers has sent megacap tech stocks on a decade-plus of dominance.
The largest tech stocks have returned multiples of the S&P 500’s return over the past 10 years, as shown below.
These are incredible returns from giant companies, but the relentless demand to own them has been driven by one thing…
Rock-bottom interest rates.
With interest rates near zero, these Big Tech names have become the default place to invest new money.
What you need to know as an investor is that there’s an inverse relationship between tech stocks and interest rates.
When interest rates fall, tech stocks rise.
When interest rates rise, tech stocks fall.
That’s because most of the valuation that the market assigns to a tech stock (like all growth stocks) relates to its future earnings.
The value of those future earnings is calculated by discounting them by the current rate of interest.
And judging by the ongoing course of inflation, we can assume that interest rates are going to go much higher…
The Money That Rotates Out of Big Tech Goes Where?
We have historical precedence in the market that shows us what happens to growth stocks in an environment of high inflation and rising interest rates.
In 1973, popular large cap growth stocks (the megacap tech stocks of that era) were decimated.
Plummeting growth stocks sent the S&P 500 into one of the worst bear markets in history, as you can see below.
Do you know which stocks weren’t decimated?
The businesses that benefit from inflation – companies that produce the hard assets that rise in price along with inflation.
In October, I explained why I thought the metals and mining industry was an attractive investment.
I noted that metals and mining stocks are trading at their biggest discount to the rest of the market in recent memory.
With inflation heating up, I thought they could go on a tear because higher hard asset prices would drive earnings increases.
I feel the same way now. Unsurprisingly, Crescat is also bullish on metals and mining producers.
In its exact words, “Gold and silver producers are trading at historically low free-cash-flow multiples and strong near-term growth prospects. We love them.”
The beautiful thing about buying high-quality gold and silver producers today is that, even if we are wrong and inflation cools, you aren’t going to lose anything.
These companies are already at historically low valuations and can’t go much lower.
On the upside, there’s a lot of room to run through both valuation multiple expansion and earnings growth.
Low risk, high reward…
Plus, your perfect protection against inflation.