I understand the fear when stocks crash 30% or more in a short span of time. We always find negative reasons to justify the huge crash and fear about those reasons. In the worst case, we sell out all growth stocks and go to cash.
I had the experience in early 2021. In that crash, I thought in 2020, all SaaS companies got a COVID boost and they will slow down dramatically in 2021. it turned out not all SaaS companies slowed down. Most SaaS continued their growth trajectory. Some did slow down: e.g. PTON, ZM, DOCU, CRWD etc…
I think the anticipation of the negative effect of rising interest rate on growth stocks is more a self fulfilling prophecy than actual effect. It’s similar to anticipation of lockup expiration.
Rising interest rate causes short term sector rotations not permanent exit from growth stocks. How many people are using formula and interest rate to do discounted cashflow calculation(DCF) to obtain stock valuations? (Not that many people are good at math!) Chances are growth stocks are always expensive according to the DCF analysis and those DCF believers will wait a long time or never have a chance to buy the best growth stocks. It’s the reason value investors normally don’t own growth stocks, especially hyper growth stocks. They look at stocks like: Cloudflare, snowflake, Monday.com and proclaim in disbelief how they can have such high P/S . Simple: high quality fast growing companies are expensive. There’s no fixed fair valuation to assign to all companies because due to different market perceptions, each company has its own fair valuation. If the market likes a company more, it’ll get a higher valuation than a similar company. Valuation is just a guess.
Let’s use a couple winning growth stocks and see how they performed during the interest rate increase since last year.
Start date: 1/4/2021
End date: 1/3/2022
10 year yield: Increased from 1.10% to 1.66%
**Stock Start price End price Gain**
DDOG $91.23 $163.83 79.58%
NET $74.59 $126.16 69.14%
ZS $196.09 $301.83 53.92%
Average gain: 67%
So how did a 1.10% to 1.66% increase in interest rate derail those growth stocks? If you do the DCF calculatoin with two different interest rate, the results will be very different and the stocks are not possible to have 67% gain in a year.
Good read:
http://www.blackrock.com/sg/en/insights/why-rising-rates-won…
P.S. My view on 6% is that it’s temporary. It’s due to pent up demand (demand of product is more than supply. ) and supply chain issue. Both will be solved over time. Note we don’t have a baby boom like 1980s so we won’t have prolong hyper inflation. Actually, sad thing to say many people died and there are few people than without COVID.