How to Better Invest in Growth
Doug Walters
It has been a difficult 2022 for those who invest in growth. Evidence-based investors like Strategic are not surprised to see this weakness. We prefer to seek growth in combination with other proven investing factors.
Contributed by Doug Walters , Max Berkovich , David Lemire
“Growth” stocks underperformed this week and are having a tough year. But growth is a surprisingly nebulous term in investing. This week, we take a moment to talk about what it means to invest in growth and why you will rarely hear us talk about doing it.
In its most basic form, growth is the opposite of cheap. Most people have a good understanding of cheap or “value” stocks. A company with a low value compared to its current earnings is considered cheap. So if growth is the opposite, then growth stocks must be expensive stocks. That is exactly right! What does growth have to do with being expensive? In theory, if a company’s earnings are expected to grow, you should be willing to pay a lot now compared to their current lower earnings.
We generally do not talk about investing in growth stocks. Why? Because “growth” is not a rewarded investing factor. In other words, growth (or expensive) stocks do not tend to outperform the broader market in the long run. Value, on the other hand, is a rewarded factor. That is not to say that we never invest in growth stocks. There are other rewarded factors, namely Quality, Momentum, and Small Size. Some growth stocks fit nicely within these categories. Apple (APPL), Microsoft (MSFT), and Nvidia (NVDA) are all quality stocks that are also growth stocks. Tesla (TSLA) and Alphabet (GOOGL) are classified as both momentum and growth.
So do we invest in growth? Yes, but not as a factor. We prefer to follow the evidence and get our growth exposure through the proven rewarded factors Momentum, Quality, and Small Size.
Headlines This Week
US stocks fell this week, erasing the surprise gains of last week and then some. The Russia-Ukraine conflict remained on center stage for investors, while a few notable economic headlines provided a temporary distraction.
Swift Response
The escalation of the war resulted in an unprecedented economic response from the West. Some of the sanctions include:
- Freezing access to $630bn of Russia’s central bank dollar reserves.
- Banning dealings with the Russian central bank, its wealth fund, and finance ministry.
- Removal of some Russian banks from the Swift messaging system, when enables cross border transactions.
- Targeting Putin, Russian oligarchs, and Foreign Minister Lavrov with personal sanctions.
Economic sanctions may be more palatable than sending troops, but they will have a cost of their own (we are already seeing much higher energy prices), some of which may not be clear for years.
In the Hot Chair
This week, Fed Chair Powell testified in front of the US Senate and Congress.
- The Chairman broke with convention and stated his support for a 25 basis point rate hike (as opposed to 50).
- Typically lawmakers get only cryptic hints and body language to interpret.
- Either the Chairman is trying to force the governors’ hands or, more likely, there is broad support for the move.
Bad Good News
As we previewed last week, good news was bad news on the jobs front.
- Non-farm payrolls were up 678K in February, well ahead of the 400K that had been forecast.
- On balance, better economic data, particularly with respect to jobs, put more pressure on the Fed to raise rates faster.
- It will likely not have much impact on the March rate decision given the Fed Chairman’s testimony, but it did impact growth stocks which were weak on the day.
The Week Ahead
Investors will continue to follow developments in Ukraine, but there are other things on tap to move markets if tensions cool.
Gathering of the People
China holds its Chinese People’s Political Consultation Conference (CPPCC) and National People’s Congress (NPC) this weekend.
- CPPCC is the Chinese Communist Party’s political advisory body, and NPC is the parliamentary body of China.
- Expected topics include the Zero-Covid Policy, Russia-Ukraine conflict, and housing market support.
- China is expected to downgrade its 2022 Gross Domestic Product (GDP) growth target to 5%-5.5% from 6% and set an inflation target of 3%.
Eurovision
The European Union, United Kingdom, and Japan report fourth Quarter 2021 GDP this week, but the European Central Bank’s (ECB) rate decision will be the main event for the developed markets.
- GDP prints are not expected to produce any new information.
- The previous ECB meeting took a more hawkish pivot when President Lagarde avoided ruling out 2022 rate hikes.
- Markets are pricing in a small hike in the latter part of the year still.
- With war near the border and oil prices skyrocketing, the economic outlook has deteriorated in a month.
- Will these developments slow down the asset purchase unwind and take rate hikes off the table for 2022?
The “Unlikeable Election”
South Korea has a Presidential election mid-week.
- The current President of Korea, Moon Jae-in is termed-out, so 14 candidates are vying as successor for a onetime 5-year term.
- The top two candidates are very close in the polls and significantly ahead of the other candidates.
- Lee Jae-myung is currently trailing Yoon Suk-yeol.
- Yoon is the more business-friendly candidate. However, both candidates lack foreign policy experience, have a high disapproval rating, and have been mired by scandals, making this a choice between two unlikable candidates.
Where I Lay My Head is Home
With all focus abroad, we might forget we have an inflation boogeyman in the U.S.
- On Thursday, the Consumer Price Index (CPI) release is expected to report an increase of 0.7% month-over-month.
- A much higher print may again move the markets to price in 7 rate hikes this year.
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