Why the Stock Market Has Changed How it Invests in 2022
Why Value Investing is being favored over Growth Investing to start 2022.
2022 has left many investors scratching their heads, with many popular stocks down 50%+ year to date. Growth investors have been left looking at portfolios a fraction of the value as they were just a few months ago. In all of this market madness, many investors have been searching for safety, stocks that may even be “recession proof”. Other investors have completely left the market, going all-in cash and waiting for the pain to be over. So, where has the most pain been, and what, if any, stocks are performing well? Let’s dig in.
In this first screenshot, I am comparing some popular “growth stocks” to the S&P 500, a benchmark index for the stock market. As you can see, many big name companies, especially among retail investors, are down anywhere from 20% to almost 70%. This makes the performance of the S&P 500 index, down almost 14%, look much more favorable. The ARKK ETF, Cathie Wood’s staple ETF that tracks “innovative companies”, has free-fallen from the highs it saw during the pandemic, and many investors are questioning the future of the ETF. Stocks like Netflix (NFLX) and Alphabet (GOOG) have disappointed on earnings and guidance, sparking even more recessionary fears. For Tesla (TSLA), most of the fear seems to be partnered with Elon Musk’s purchase of Twitter, as the news out of Tesla is very promising.
Now, let’s look at some other stocks that have been performing relatively well compared to the stocks we have already looked at.
These stocks above are all outperforming the S&P 500 Index year-to-date, but why is this? All these stocks are what you call Dividend Aristocrats, which means all these companies have raised their dividend for 25 consecutive years, proving to investors that every year they can expect to receive a higher payout than the year before. Dividend stocks like the ones above, offer investors safety in fearful times, and the most safety is seen in these Dividend Aristocrats. A note on Chevron, their incredible performance is due in part to the conflict in Ukraine, but it is no doubt that with it’s 3.30% dividend yield, it would attract investors regardless.
This next group of stocks all have something in common, but it might not be obvious by just looking at them.
These stocks that I am comparing to the S&P 500 are what are called “Consumer Staples”. Consumer Staples are companies that have pricing power over their consumer, meaning they are generally slower growth companies and offer products or services that consumers will buy no matter if the price goes up or down. Proctor & Gamble offers a wide range of cleaning products, Walmart offers cost-effective shopping, Coca-Cola offers a range of popular beverages, and Kraft Heinz offers a range of food products. All these companies offer products that many consumers view as a necessity, and this trait leads them to be a “flight to safety” in times of fear and recession, as investors believe that they will still report strong numbers no matter what challenges they face.
This last screenshot compares VTV, Vanguard Value Index ETF, and VUG, Vanguard Growth Index ETF. This shows the vast difference in the performance of different types of stocks this year. This has sparked a debate between “Value” investors and “Growth” investors. Value investors are investors like Warren Buffett, looking to buy profitable companies below market value. Growth investors, on the other hand, are investors who want to invest in companies who’s returns are expected to grow faster than other companies in their sector, and are highly dependent on consumer demand. Growth investing is generally considered to be riskier than value investing due to the uncertainty of earnings for many “growth” companies. During market rallies and bull markets, growth investing generally outperforms value investing, but the script flips during bear markets. This caused many growth investors to boast their outsized gains during the recent rally, while value investors continued modest gains. This, of course, has changed dramatically to start 2022.
In conclusion, we are seeing a shift in market cycles, causing the shift of focus from growth to value investing. Dividend stocks, consumer staples, and risk-aversion is being favored over high flying growth stock names. Each type of investing has its own time to shine, and we are seeing the shift in front of us. As long as you believe in how you invest, and are ready to weather the storm of volatility, then you will win in the long term. If you want to de-risk your portfolio, while there is always risk in any form of investing, these dividend aristocrats are worth researching. These stocks have become much more popular as of late, and will continue to offer investors guaranteed income through dividends while the market remains volatile.