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Growth Struggling

Growth Is Struggling

Growth stocks are struggling in 2022. This fact was apparent last week when I wrote about Buffett is Buying. However, this fact is not surprising. 

Growth stocks had three good years in a row from 2019 to 2021. According to BlackRock’s periodic table of asset class returns, large-cap growth returned 36.4% in 2019, 38.5% in 2020, and 27.6% in 2021. Furthermore, large-cap growth was No. 1 or No. 2 when ranked by returns in five of the past seven years. Even the best performing 2021 dividend growth stocks tended to be more growth-oriented.

Value stocks were eventually due for a good year, especially since market valuations tend to revert to the mean over time.

Let’s summarize it below with more data, and you can come to your own conclusion about why growth stocks are struggling in 2022.

Growth Struggling
Growth Is Struggling

Nasdaq is Performing Poorly

First, according to Stock Rover*, on a year-to-date (YTD) basis, the Nasdaq 100 and the Nasdaq are the worst-performing of all the indices at (-14.8%) and (-14.5%), respectively. On the other hand, the FTSE 100 and S&P/TSX are up. This point is probably because of the higher relative number of commodity producers in these indices.

Nasdaq is Underperforming
Source: Stock Rover*

In the US, the top-performing Index is the Dow Jones Industrial Averages (DJIA) at down only (-5.2%). The 2022 Dogs of the Dow are performing even better and are up 6.5%, driven by double-digit returns from Chevron (CVX), Dow (DOW), Merck (MRK), Amgen (AMGN), and Coca-Cola (KO). 

Dividend Power identified some of these stocks as undervalued with good dividend yields in 2021.

Technology and Communications Are Down

The two sectors full of growth stocks are Technology and Communication Services. Both are performing poorly and are the two worst performing sectors YTD. Technology is down (-16%), and Communications is down (-14.7%). Some individual stocks are down far more.

On the other hand, traditional value sectors are doing well. For example, Energy, Utilities, and Consumer Defensive are all up for the year. Additionally, Basic Material and Healthcare are performing well on a relative basis.

Growth vs. Value

Next, if we compare growth stocks and value stocks, we can see a significant difference in performance. In this comparison, we observe the performance difference between the iShares Russell 1000 Value ETF (IWD) and iShares Russell 1000 Growth ETF (IWF). Combined, these two ETFs have more than $110 billion in assets.

The comparison shows IWD is down (-1.2%) while IWF is down (-14.2%) YTD, a significant difference.

IWD vs IWF
Source: Stock Rover*

Why Are Growth Stocks Are Struggling

The primary reason growth stocks are struggling is rising interest rates. The US Federal Reserve has changed its stance from thinking inflation will be transitory to inflation may take longer to control. The Fed views the US as at full employment, but inflation is now 8.5%, the highest since the early-80s.

Inflation is rising due to a combination of tariffs from the prior administration, labor shortages due to low immigration, and the retirement of older workers. In addition, the Fed was arguably late in tapering their US Treasury and Mortgage-Backed Securities (MBS), buys, and increasing interest rates. They only started tapering in late 2021 and implemented the first rate increase since 2018 in March 2022.

It is probable that the Fed will be very aggressive in 2022 as it reduces its balance sheet and implements additional rate increases. This change will likely put extra pressure on growth stocks, which will struggle further in 2022.

Final Thoughts on Growth Is Struggling

Despite the challenges faced by the stock market, some sectors and value stocks are performing well. Dividend growth stocks are performing well too. According to our watchlists on Stock Rover*, the 39 Dividend Kings are down about (-4.7%), and the 65 Dividend Aristocrats are doing better at (-2.2%).

Many stocks were overvalued at the end of 2021, but their valuations have returned to earth. For instance, we have identified the following stocks or lists so far in 2022 as undervalued or potentially good deals.


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The Stock of the Week

Today we highlight Starbucks (SBUX), the retail coffee chain giant. The stock price has been under extreme pressure due to COVID-19-related shutdowns in China and the seemingly successful unionization drive at its stores in the US. China is the No. 2 market for Starbucks. The unionization drive may cause an increase in labor costs. Furthermore, Howard Schultz has come back as the temporary CEO to fill in for the former departed CEO. Other members of senior management have also left. The stock price is down more than (-31%), and the dividend yield is up to about 2.5%, the highest since March 2020. Despite the negative news, the company is still the market leader, and the dividend safety metrics are excellent. Starbucks should maintain its market leadership, and this Dividend Contender should continue raising the dividend.

The screenshot below is from Stock Rover*.

Starbucks Stock Price Overview
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of March 2022. As a result, the number of companies on the list has risen to 548. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Four new additions indicate companies are experiencing solid profits and cash flow in March.

The new addition was Orchid Capital (ORC), Lument Financial Trust (LFT), 360 Digit Tech (QFIN), and James River Group Holdings (JRVR).

Market Indices

04/16/22

Dow Jones Industrial Averages (DJIA): 34,451 (-0.78%)

NASDAQ: 13,351 (-2.62%)

S&P 500: 4,392 (-2.13%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 22.2X, and the Schiller P/E Ratio is about 34.6X. Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively. 

The market is still overvalued despite the recent market correction and rebound. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was up about 1.5 points to 22.70. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

CBOE VIX
Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The US Bureau of Labor Statistics reported the consumer price index rose 1.2% in March, followed by a 0.8% increase in February. The index’s year-over-year rate is up a seasonally adjusted 8.5%, the fastest annual pace since December 1981. Increases were broad-based with the indexes for gasoline (+18.3%), shelter (+0.5%), and food (+1.0%) primary contributors. Shelter is up 5.0% year over year, the biggest annual increase since May 1991. Also contributing were increases in airline fares (+10.7%), household furnishings and operations (+1.0%), medical care (+0.5%), and motor vehicle insurance (+07%). The index for used cars and trucks dropped (-3.8%). The annual rate of core CPI inflation is 6.4% and is the largest 12-month change since the period ending August 1982.

The US Energy Information Administration reported that US commercial crude oil stockpiles increased by 9.4M barrelsto 421.8M barrels (13% above the five-year average) for the week ending April 8th. The increase is due in part to the releases from strategic reserves. Crude oil refinery inputs averaged 15.5M barrels per day, a decrease of 424K barrels per day compared to the previous week’s average. Gasoline inventories decreased by 3.6M barrels (3% below the five-year average), and distillate inventories fell by 2.9M (17% below the five-year average). Refineries operated at 90.0% of their operable capacity as gasoline production increased, averaging 9.5M barrels per day.

The Commerce Department reported advance US retail and food services sales increased 0.5% to $665.7B in March; this follows an upwardly revised 0.8% increase for February and a 3.8% jump in January. Data for February was revised up from 0.3%. Retail sales are running 6.9% higher than a year ago. Total sales for January 2022 through March 2022 were up 12.9% year over year. The biggest contributing factor was gas station spending, an 8.9% increase. Excluding gasoline, retail sales fell 0.3% in March. General merchandise stores (+5.4%), sporting goods (+3.3%), electronics stores (+3.3%), food (+1.0%), and home furnishings (+0.7%) all saw increases, while spending for motor vehicles (-1.9%) and nonstore retailers (-6.4%) saw declines.

Thanks for reading Growth Is Struggling – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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