What’s up with growth stocks? For nine years, investors couldn’t get enough of them. For the past fifteen months, investors don’t want to touch them. Was it a simple matter of rising interest rates? If so, could a recession accompanied by falling rates help them regain leadership over value stocks? Or does growth as a category have a deeper problem? This article takes a shot at the answers to these questions.
I thought the article is a very interesting discussion on large cap growth and value stocks as embodied in Vanguard ETFs VUG and VTV. They use different multi factor criteria in constructing the indexes, so it is possible, though very unlikely, that a stock could fulfill criteria for both indexes. They are not constructed like the Russell indexes where half the stocks are in one index and the test in other, based on the factor rankings.
What’s up with growth stocks? For nine years, investors couldn’t get enough of them. For the past fifteen months, investors don’t want to touch them. Was it a simple matter of rising interest rates?
A much simpler explanation would be that typical growth stocks, having been in fashion for so long, simply got overpriced.
There doesn’t seem to be any need to look at interest rates or other fancier explanations.
Some investors quite rationally no longer saw much upside holding them at those prices, so stopped holding them.
Without enough marginal new buyers to replace those marginal sellers, the prices fall.
There are very interesting conversations to be had about what “overpriced” means when valuing high growth companies with low current profits.
But in this context it doesn’t matter what methodology you use. If the investors in a firm decide it’s overpriced relative to prospective returns, based on whatever criteria, they’ll sell.