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.
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.
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