The path for growth investing hasn't changed The path for growth investing hasn't changed\images\insights\article\road-long-windy-green-hills-small.jpg February 15 2022 January 31 2022

The path for growth investing hasn't changed

Megatrends and secular shifts continue to create long-term opportunities.

Published January 31 2022

With the pivot to value stocks well entrenched, the winds have clearly shifted for growth investing in 2022. Add in concerns over inflation, geopolitics, the omicron variant and hawkish monetary policy and it’s clear that many investors are focused on de-risking their portfolios. The extent to which this continues remains to be seen. The age-old advice to buy the dip is frustrating when the dips keep coming.

The sell-off in growth sectors has been dramatic. Recall 2020 was one of the largest outperformance years for the growth complex of stocks relative to value in recent history. For example, as reflected by their respective Russell 2000 Indexes,1 small-cap growth was up 35% versus small-cap value’s 5% rise, driven by Covid-related shifts to stay at home and an emphasis on the digital economy. Key growth sectors, Technology, and subsector biotech were up 40% and 50%, respectively. In 2021, this trade reversed almost a full 180 degrees, with small-cap growth returning just 2% versus small-cap value’s 28% increase. Cryptocurrencies like Bitcoin, which have shown strong correlation with tech stocks, plunged more than 50% from recent highs and there’s also a significant slowdown in the initial public offering market. Meanwhile, the momentum for stocks in cyclical sectors—Energy, Industrials, Consumer Staples—has continued into this year.

How should growth investors navigate this environment? A good place to start is by employing an historically proven approach: find high-quality growth stocks supported by reasonable valuations and significant long-term prospects, all while appreciating style rotations and market corrections are painful but normal, arguably even necessary. It’s easy to forget that sell-offs often are when potential long-term wealth opportunities are created for patient investors.

We believe that innovation, be it in artificial intelligence, software-as-a-service, the metaverse or biotech, is a long-term secular trend whose impacts will intensify in coming years, accelerated by a pandemic that has indelibly changed consumer behavior and business operations. For example, spurred by the Covid crisis, the dramatic increase in online shopping is unlikely to abate. This in turn has contributed to increased investment in such growth industries as logistics, data mining and web services as companies adapted their business models.  The ravages of the pandemic also intensified research on preventatives and treatments across the health-care spectrum that depend on genomic research and biotech discoveries.

Whether it’s three, six, 12 months or longer, the Fed’s pivot, inflation and Covid-19 impacts will run their course and be absorbed by the market. And while stocks in growth areas have taken a tumble, you can be sure that selective investors are mining the field for strong opportunities, recognizing the duration and pace of growth these companies can potentially generate.

1 Russell 2000 Growth Index and Russell 2000 Value Index

Tags Equity . Active Management . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Growth stocks are typically more volatile than value stocks.

Russell 2000® Growth Index: Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Value Index: Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

The fund may invest in small capitalization (or “smallcap”) companies. Small-cap companies may have less liquid stock, a more volatile share price, unproven track records, a limited product or service base and limited access to capital. The above factors could make small-cap companies more likely to fail than larger companies and increase the volatility of the fund’s portfolio, performance and share price. Suitable securities of small-cap companies also can have limited availability and cause capacity constraints on investment strategies for funds that invest in them.

Stocks are subject to risks and fluctuate in value.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

Federated Advisory Services Company