2022 Growth and Value + Businesses start to scale back.

December 16, 2022

It probably doesn't feel like it, but 2022 brought us a lot of normalization. Millions of people discovered the severe downside to meme stocks, crypto has one foot in the grave soon to be two, interest rates are returning to historical norms, supply chains are gradually improving, and speculative venture capital is drying up. It's not all normal: for example there is a mind-boggling amount of money that has been printed/committed and hasn't flowed through the system.

Let's dig into one effect that is striking.

As of today, the total return gap between large-capitalization value (red line) and large-capitalization growth (blue line) stocks is 30% for 2022. That is a large gap! If you held all-value stocks, and had reinvested the dividends, you would be roughly break-even for the year (last week you would have actually been up about 3%):

What is going on? Aren't these tech and bio companies the future? Why did investors get so negative on growth stocks in 2022?

1. First, and remember that this pertains to other performance returns as well: we came off a huge 2021, and a huge 2020. So stock prices were high in growth stocks, and they peaked right at the end of last year. So they are retreating from what looked like the top of Everest in hind sight.

2. Growth indexes assume rosy and improving corporate results in the future. However, if interest rates rise, an investor can make more money in a less-risky bond in the meantime. This means that the investor has to get more value today, when compared against the less-risky alternative. To get more value, the price of the growth stock needs to fall. Because the reward is delayed so much in time with growth stocks, the magnitude of the swing will be greater.

3. Similar to, but not the same as the previous point. Growth stocks are valued on events in the future, sometimes far in the future. The further something recedes in time, the more risk there is that the desired outcome will not be achieved. In times of economic uncertainty or recession, people like to batten down the hatches and shy away from this type of risk.

There is good news here. We really, really (that's two really's!) like it when asset classes do not correlate. There are all kinds of opportunities that open up on the rebalancing side of the operation. Big moves in asset classes often reflect investor emotion, either positive or negative, and a good investor is trying to take advantage of the fact that many investors do not have enough emotional control.

It's natural. At this time of year people want a sense of what is coming next. You need to remember that the stock market is a forward-looking vehicle. It is trading today on where it expects things to be probably 9 to 12 months from now. Because of this, if we enter a recession, or if we're in one and it gets deeper, the market might start to turn right as we go through the worst period. This trips people up all the time, they think the market reflects what they see in the news. It doesn't.

Burta Kelly runs our HR and operations here at One Day In July and she's plugged into all kinds of HR channels. Layoffs are coming early in the new year. The financial industry will start (although One Day In July is hiring!), as it tends to react quickly, and it will spread. It's not clear how deep things will get, as there are still job openings. The depth is anyone's guess.

If you do get laid off or lose hours and you are a client please be in touch with us. Jobs are jobs, it's not a statement about you. We realize it is stressful and we want to help.

Dan Cunningham

^{p.s. I'll recap a few other things next week, so not quite signing off for the year yet. Contain your enthusiasm!}

^{1. Chart graph credit StockCharts, VYM ETF represents large-cap value, VUG ETF represents large-cap growth.}