Apple stock fell 18% from Jan. 3 to March 14.
Dale Del La Rey/AFP via Getty Images
Growth stocks like Apple and Tesla have had quite the time these past four months–retreating, then roaring. Now, they look like they are finding their footing as the economy looks like it could slow down.
It’s a cycle that seasoned investors know well: a rebound for growth stocks after an economic growth spurt that the Federal Reserve decides to clamp down on.
The rise and fall of growth stocks has been dramatic. The Nasdaq-100, an index of large-market capitalization and fast-growing technology stocks, hit an all-time high of 16,573 on Nov. 19, then started going down until it hit 13,046 on March 14, a record low. The drop, in those 120 or so days, was 21%.
Apple (ticker: AAPL), the heaviest weighted name in the index, fell 18% from Jan. 3 to March 14. Tesla (TSLA), the fifth-largest holding, fell 38% from early November to March 14.
The decline in growth stocks was far worse than those for the Dow Jones Industrial Average and the S&P 500, which are made up of mostly value stocks. The Dow industrials lost 11% and the S&P 500 fell 13%.
For growth stocks, the main culprit was surging long-dated bond yields–pushed up by expectations about what the Federal Reserve was going to do about 40-year-high inflation fueled by an overheated economy.
Fed Chairman Jerome Powell signaled that the central bank would both raise interest rates seven times this year and end its bond-buying program that once totaled $120 billion a month. And the Fed has done just that, winding down its bond buys and instituting its first interest rate hike.
Taking that money away from the bond market reduces bond prices and lifts their yields. Higher long-dated bond yields make future profits less valuable—growth companies are valued on the basis that they’ll produce sizable earnings many years down the line.
Bond yields are now higher, but growth stocks are gaining because, in part, the central bank has put its money where its mouth is.
The Nasdaq-100 is up 11% from its bottom; Apple 13% and Tesla 30%. Partly driving that is more certainty about the Fed. Growth valuations, or stock multiples on expected earnings for the next year, have reflected much of the rise in yields already, as multiples have declined. To be sure, yields could still rise from here, but growth stocks have been smacked already.
“Growth and high-multiple tech have spent much of 2022 being punished as rates have risen, but they are bouncing back now on some hopes for Fed clarity,” wrote Tom Essaye, founder of Sevens Report Research.
For investing newbies, all of this might seem at least a little bit contrary to common sense. But veteran investors consider this growth revival to be fairly normal for this stage of the economic cycle.
Usually, before the Fed tightens monetary policy, growth stocks lag behind their value counterparts. That’s often because strong demand drives up consumer prices—and value stocks see strong earnings growth when the economy picks up steam.
Then, the Fed tries to tame inflation by lifting short-term interest rates, which causes a slowdown, sometimes even a recession. Any letup is an incentive for investors to ditch value stocks for growth ones.
And a slowing economy can cap long-dated bond yields. Overall, growth valuations stop declining, allowing their expected profit growth to bring their stock prices higher.
The long-timers will remember two stark examples of when this has happened before. Between about 1990 and 1993, large-cap growth underperformed large-cap value, according to RBC data. Then, the Fed began tightening in 1993 and growth trounced value for several years. Between 2015 and 2018, growth again couldn’t keep up with value. Just as the Fed started tightening in 2018, growth outpaced value through the first half of 2021.
So here we are. It’s déjà vu all over again, as Yogi Berra would say.
Write to Jacob Sonenshine at [email protected]
