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Worried About a Recession? Prepare for a 20%+ Rally Instead

[Editor’s note: “Worried About a Recession? Prepare for a 20%+ Rally Instead” was previously published in April 2022. It has since been updated to include the most relevant information available.]

These days, everyone seems to be worried about a U.S. recession and stock market crash. But we believe all that fear is setting up the stock market for a huge rip-your-face-off rally over the next 12 months.

An image of a red arrow plunging downward overlaid on stock tickers; U.S. recession
An image of a red arrow plunging downward overlaid on stock tickers; U.S. recession

Source: Shutterstock

Folks, the reality is that recessions and crashes don’t happen when everyone expects them to. They happen when everyone doesn’t expect them.

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It’s Behavioral Economics 101.

When people expect a recession, everyone acts in a fearful and cautious way. And that wariness keeps us from getting too close to the edge. But when no one is expecting a recession, folks are carefree. And the absence of caution and fear leads us to walk right off a ledge.

That’s why, after reading CNBC’s recent reporting that more than 80% of U.S. adults are worried about a recession, we got bullish.

A graph showing the percentage of recession fears among different US populations
A graph showing the percentage of recession fears among different US populations

According to behavioral economics theory, with recession fears that high, we are all but guaranteed not to tip into a recession.

But this is more than theory. History and data support this claim, too.

And as a result, we’re very bullish on what could be a massive stock market melt-up over the next 12 months.

U.S. Recessions Follow Peak Euphoria – Not Peak Fear

Let’s consider previous crashes and recessions for a moment. Specifically, let’s think about the months leading up to some major market crashes.

The stock market most recently crashed in March 2020 due to the COVID-19 pandemic. What were folks thinking in January and February? They were bullish. Consumer sentiment hit a multi-year high of 101 in February 2020. And Google search interest in the term “recession” hit a multi-year low the previous month.

So, in the months prior to March 2020’s crash and recession, no one was thinking about either of those things.

Let’s rewind further to the 2008 financial crisis, which started in late 2007. In early-to-mid 2007, we again see that consumers were generally bullish and unconcerned about a recession. Consumer sentiment was clocking in consistently north of 80 — very solid readings. And consumers didn’t start Googling “recession” in any meaningful capacity until late in the year.

Again, it looks like the 2008 financial crisis was preceded by abundant consumer optimism and strength. No one was talking about a recession or a crash in the months prior.

What about the 2000 dot-com crash? Heading into that, consumers were wildly optimistic. Consumer sentiment was regularly above 100 for most of 1999 and 2000. In fact, this marked one of the most optimistic periods for U.S. consumers on record.

And as for the 1990 recession, consumers were extremely optimistic and unconcerned with economic downturn before it as well. Throughout 1989 and 1990, consumer sentiment was often above 90.

We see it time and time again. Recessions and stock market crashes always follow periods of peak euphoria – not peak fear.

Data Implies We’re Due for a Big Rally

Here’s the thing about today: We’re in peak fear.

Consumer sentiment has been dropping precipitously for over a year now. And it just hit a decades-low reading of below 60. Meanwhile, Google search interest in “recession” is spiking to levels not seen since the depths of the COVID crash.

Such conditions don’t normally precede recessions and stock market crashes. They normally mark the bottoms of selloffs.

Right now, we’re in a very unusual — and ostensibly bearish — time for the U.S. economy. Basically, the U.S. consumer has never been more scared.

Consumer sentiment has collapsed over the past year and now sits at 59.1. That’s its lowest since 2011 — and one of its lowest readings ever.

That seems bearish. But upon closer inspection, it’s super bullish!

We’ve seen such big drops in sentiment to ultra-low levels of 60 or below just five times before. They were mid-2011, late 2008, late 1990, early 1980 and late 1974.

Each time, the plunge in consumer sentiment came on the heels of a stock market selloff. Four out of the five times, though, stocks rallied over the next three months. And all five times, stocks rallied over the next 12 months. The average three-month-gain? About 7%. The average 12-month-gain? A very impressive 24%.

A chart showing the contrarian relationship between U.S. consumer sentiment and buy indicators
A chart showing the contrarian relationship between U.S. consumer sentiment and buy indicators

Historically, big drops in U.S. consumer sentiment have served as promising contrarian BUY indicators. They always precede massive stock market rallies, not crashes.

We don’t think this time will prove any different.

U.S. Recession Fears Will Protect the Markets

Today’s plunge in consumer sentiment is indicative of a market that’s being cautious enough to avoid walking off the ledge. And it’s one that is ready to rip higher on any good news.

Maybe that’ll be a dovish pivot from the Federal Reserve by summer or a ceasefire agreement between Russia and Ukraine. Maybe it’ll be China rethinking its zero-COVID policy or a drop in oil and commodity prices.

Any one of those things could happen over the next few months. And if so, then the current stock selloff could turn into a 20%-plus melt-up in a hurry.

What’s happening with the markets now reminds me of when I first learned to ride a bike. I wore a helmet and knee pads, and I pedaled at a snail’s pace. I stopped and looked for every obstacle. And while it took me forever to get from point A to point B, I never crashed.

As the years went by, I gained more confidence in my bike-riding abilities. I lost the helmet and the knee pads. I began zooming down hills and across busy streets. Ultimately, I threw caution to the wind.

And shortly thereafter, I had a nasty crash than sent me to the emergency room.

That’s not a coincidence. I crashed when I stopped being careful.

The same is true for the markets and the U.S. economy. You don’t have to worry about a crash or  recession when everyone’s talking about them. You have to worry when no one is talking about them.

What are folks doing today? They’re buzzing non-stop about a possible recession — which means that you don’t have to worry about one just yet.

The Final Word on Recession Fears

Buy the dip in stocks. They’re due for a massive melt-up against the backdrop of these overstated recession fears. Then, once they disappear in 12 or 18 months, that’s when you want head for the exits. And, of course, that’s after you’ve made some big gains.

While everyone else is paralyzed by fear, you can turn the current market chaos into personal opportunity. If this sounds like an investment strategy you want to embrace, then look no further.

There’s a lot of money to be made in the stock market over the next 12 to 18 months — a lot of money. And I don’t want you to miss out on any of it.

Find out how to profit from what will turn into a massive market melt-up.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

The post Worried About a Recession? Prepare for a 20%+ Rally Instead appeared first on InvestorPlace.