TheStreet’s Kevin Curran, studying the underlying market conditions this week, has some advice for antsy investors – keep an eye on the staying power of the current market upturn, as it’s crucial for portfolio positioning.
“It seems that with each pullback that has hit the market over the past decade, the idea is floated that a real rotation to value from the high-flying growth stocks that have dominated in recent years is imminent,” Curran said in Real Money.
However, against a backdrop of an accommodative Federal Reserve, a strong economy and low inflation, high-multiple stocks have persisted in pushing higher and leading the market. “As these variables augment, there arises a serious question as to whether this time is different,” he noted.
Other market mavens concur with that assessment.
"'This time it's different' are the four worst words in investing. However, we believe this time it definitely is true and things are different," Chuck Etzweiler, Senior Vice President of Research at investment advisory firm Nepsis, told Real Money. "With rising rates and inflationary pressures, we suggest investors shift away from companies with speculative futures and towards those with stability and quality fundamentals that set them apart in this era of restrictive federal policy and inflationary pressures."
Hitting the High-Multiples
Unfortunately for many traders, this advice was not heeded prior to the start of 2022, leading to quite a bit of pain for growth-focused investors.
For example, growth stock stalwart ETF Ark Innovation (ARKK) is down 27% year to date, while some of its top picks like Tesla (TSLA), Zoom Video Communications (ZM), Coinbase (COIN) , and Roku (ROKU) feel similar levels of pain.
For Gene McManus, Managing Partner at AP Wealth Management, the move is somewhat natural even outside of the looming pressures from the Federal Reserve.
"Last year large-cap growth stocks outperformed large-cap value stocks by over 32%," he explained. "Last year's winners are often this year's losers."
McManus added that while investors are likely to be less patient with these stocks given the sentiment shift, there is still promise in many stocks for the future.
"These companies are victims of their own success and financial performance will eventually suffer due to tighter governmental regulations due to policing and data sharing and use," he noted. "Growth stocks' value is in the future."
In the near term, McManus advised financials, industrials, materials, and energy as the sectors most likely to outperform.
“Certainly, thus far in 2022, this is a dynamic that has paid out profitably for patient investors in the sector,” Curran said. “In contrast to tech stocks taking a hit, the Energy Select Sector SPDR Fund (XLE) has risen about 15% while harder hit components like Occidental Petroleum (OXY) and Schlumberger (SLB) have risen by even greater percentages.”
Many investors also see the current market trends tilting towards interest in undervalued healthcare stocks.
"During the pandemic, healthcare has been an ignored sector; it has neither benefited from the pandemic play nor the recovery play," Hank Smith, Head of Investment Strategy at Haverford Trust Company, told Real Money. " The sector is a value play with growth attributes."
In the end, an era of rampant speculation appears to be coming to an inauspicious end. Whether it be in crypto trends, growth stock valuations, or rapidly falling NFT demand, investor appetites are clearly undergoing a swift change.
“As such, while growth aspects are going to remain welcome for investors, companies unable to push for profits and sustainable business in line with their growth are likely to remain unfavored, putting investors with large positions in these names in serious peril,” Curran said.
