A Note From Jason: Before we get to today’s essay, I want to mention a special event my friend Jeff Brown is having.
I’m sure many of us have heard about NFTs – “non-fungible tokens” – in the news lately. Maybe you’ve seen some of the crazy prices these NFTs are selling for. To many, these assets can seem strange or like a fad. But I value Jeff’s opinion. And he believes NFTs are a promising technology with applications that go far beyond digital artwork.
So if you’d like to learn more about the opportunity he sees… then I’d highly encourage tuning in to this event coming up this Wednesday, January 26, at 8 p.m. ET. Simply RSVP by going here… And don’t miss a chance to get one of Jeff’s very own NFTs… for free.
Looking at a major index like the S&P 500, you might think I’m crazy for saying stocks are tanking. The SPY (an ETF tracking the S&P 500) hit an all-time high just before New Year’s. It’s down about 5.7% since, which most would consider only a moderate pullback.
But growth investors like me know better.
Growth is under attack, and it feels like the selling will never stop. The QQQ (a Nasdaq-tracking ETF) is down 8.34% year-to-date. The small-cap-heavy IWM (a Russell 2000-tracking index) is not far behind, down 8.13%.
Combined, that’s a pretty dismal start to the year.
So, what gives?
Why are stocks getting slapped?
More importantly – what do we do now?
The Only Thing to Fear Is Fear Itself
Hi, I’m Jason Bodner. I’m the editor of Outlier Investor here at Brownstone Research.
I look for “outliers” in the stock market. Those are the few stocks that outpace all the rest. And I use an artificial intelligence (AI) system I’ve built to scan 6,500 stocks every day. This AI uses a handful of special barometers to help us identify winning stocks and big market moves.
And as I mentioned, we’ve been seeing a lot of downward moves lately…
One factor that’s been depressing stocks lately is COVID-19. But I feel strongly that the Omicron variant is the final throes of this pandemic. It is wildly more contagious than the Delta variant or original COVID. The good news is it’s far less severe in terms of symptoms.
With this new strain spreading like wildfire, cases are way up. But hospitalizations – and more importantly, deaths – are way down.
Government aid is dwindling to nothing. People will return to work. Supply chains will ease, and life should return to normal.
This is how outbreaks die. It spreads to virtually everyone, we build immunity, and then it becomes a bad memory. Think of the Spanish Flu pandemic of 1918: It was horrible then (far deadlier than COVID-19). But 100 years later, we debate whether to get a flu shot each year. Few people die of the flu, so it’s not viewed as a serious threat.
That’s where we are about to go with COVID. It’s never going away, but we will learn to live with it from now on.
That’s a bullish setup for stocks. But we humans are instinctually negative: We need to worry about something – always!
This time, it’s inflation. So let me explain why that’s smoking growth stocks…
Welcome to Taper Tantrum 2.0
Supplies got tight as COVID-19 shut down factories and froze shipping and transport of goods. When supply shrinks – prices go up.
When we add “easy money” to that equation, we get vicious inflation. You see, the Fed rescued us all by flooding the economy with money (liquidity). This was in the form of dropping interest rates to near zero, purchasing bonds, stimulus, aid, and loans.
Simply put, when there’s a bunch of money chasing fewer goods (due to low supply), prices go up.
We all feel it – at the pump, at the grocery register, at restaurants. And since it’s hard to find workers nowadays, it pushes prices even higher. I just got a notice that because it’s hard to hire accountants, the cost of their work is rising 30%!
In short, inflation is everywhere.
Now the Fed needs to do something about it. So in the December meeting notes, the Fed signaled rates will rise and bond purchases will slow. The wind-down of quantitative easing is here. And that’s freaking out a lot of investors.
Here’s why it’s hurting growth stocks…
Growth stocks are getting sold hard simply because investors worry higher interest rates will stifle growth. The prevailing thought is that when it costs more to borrow money, growth companies will need to refinance their debt at a higher cost, and it will impact profit margins and slow growth.
With higher rates looming, investors are snatching up financial stocks that benefit from lending. But they are also punishing growth stocks. Some are down 60% from their highs in a few short weeks.
But I’m not freaked out.
First of all, I believe growth stocks are the best long-term investment. Look around at today’s monster companies. You know them: Apple, Google, Microsoft, Netflix, NVIDIA, and Tesla, among others. They were (or still are) monster growth stories.
Each earnings cycle, these companies report growing sales, earnings, and profits. And that leads to huge gains in their share prices. Companies like these grow at a rapid rate and offer monster returns over time for the patient investor. The average gain of those six stocks since they first appeared on my radar (at various times) is 6,427%!
That’s why I’m a big believer in growth investing.
The Fed can’t raise rates too far, too fast because it would cripple our economy. The Fed made money easy in order to keep us afloat. It won’t turn around and crush us right as we emerge from COVID. The interest on U.S. debt could cripple our economy if it’s too expensive to service.
Goldman Sachs expects four rate hikes this year at 0.25% each. That would raise rates to 1–1.25%. That’s still historically low.
Let’s imagine the Fed went nuclear and drastically tightened. Let’s say rates rose double Goldman’s estimates. If so, we would still only be around 2%. That’s about where we were summer of 2019, when markets were at highs.
I think this is all a wild overreaction. Sellers are taking advantage of people who are afraid to buy because of uncertainty in our fiscal policy and how it will affect lives. When there is no bid for stocks, algorithms, and quant traders short stocks to make a killing.
But we will be fine. We’ve been through way worse than this: the internet bubble burst, 9/11, the Great Financial Crisis, and even the COVID crash.
Growth stocks will eventually be fine too. Right now they are simply out of favor.
But that leads me to what we should do right now…
What To Do Now
Sometimes we must go where hell is hottest to find the best deals to be had.
There’s opportunity when others lose their cool and panic. Like I said, many growth stocks are getting smoked. But companies that continually grow sales and earnings, make fat profits, and maintain low debt could be great scoops.
Having a system to identify these stocks helps, of course. It’s a lot of work to scour thousands of stocks.
That’s where my Outlier Investor system comes in. My special algorithms and metrics tell me which stocks are going on sale right now. My readers and I will be using this volatility in growth stocks to go bargain hunting.
To learn more about how to join us, you can go right here for the full story on how it works.
But if you’d rather stick it out on your own, you could consider an ETF under pressure that’s loaded with growth stocks.
One such ETF with great potential is the iShares Expanded Tech-Software Sector ETF (IGV). Looking at a one-year chart, we see it’s down 21% from highs.
But looking at a multiyear chart, we can see it’s a relatively small pullback in the long-term trend:
It holds phenomenal software companies. The top 21 stocks of the 121 total account for 70% of the ETF. And those 21 stocks have high fundamental scores according to my outlier system.
That typically means they make a lot of money and don’t have huge debt. If their debt isn’t a big deal, then they are getting unfairly punished in this Taper Tantrum 2.0. And let’s face it – software isn’t going anywhere but up in terms of usage and dominance.
We’re human, so we must worry about something. Today, it’s that rising rates will tank corporate growth. Investors are overreacting.
And I think that’s a prime time to get in there and identify deals.
It’s uncomfortable to sit through, but these rotations happen from time to time. We have to live with them.
But those who are brave and get deal-hunting now may look smart years from now.
Editor, Outlier Investor
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