Ease of Growth

June 9, 2022

Source: Bloomberg Source: Bloomberg

The NASDAQ 100 Index (NDX) is a large-cap growth index that includes 100 of the largest and most active domestic and international non-financial companies listed on the Nasdaq Stock Market. Some of the companies included are Alphabet, Intel and Meta.

The NDX, also called the “technology-friendly index,” has benefited from periods of growth and expansionary policies, given low interest rates and increased stimulus that led to the current level of inflation.

Because of their nature, growth companies tend to focus on short-term growth and the delivery of new technologies that require large investments to be developed. These growth stocks tend to follow economic cycles, and therefore become cyclical. As the economy “booms,” companies follow a prosperous path. However, the opposite happens when the economy contracts. As the Federal Reserve raises interest rates and reduces its balance sheet, we see growth companies struggling to generate profits and lagging in the development of newer technologies.

This week’s chart shows the correlation between the Consumer Price Index year-over-year (CPI YoY) and the NDX. Despite supply chain bottlenecks, companies in the index have been able to increase their earnings given spending growth, in an environment with low interest rates and high spending. As prices increased, companies within the growth index grew at a faster pace than value companies, until interest rates were raised.

From March 31, 2020, to Dec. 31, 2021, the NDX increased 108.38% (52% annualized), its largest bounce ever, partially due to stimulus, low rates and other factors. Nevertheless, growth stocks tend to be hurt the most in periods of tightening and higher rates. Such is shown in the chart — since the beginning of 2022, the NDX is down 23.11%, given the expectations of higher rates at the time.

Key Takeaway    

In the last 20 years, the NDX outperformed the S&P 500 Index (SPX) 13 times. The seven years that the SPX outperformed the “growth index” were from 2001 to 2008. During this period, interest rates were raised as high as 5.25% in 2006 and decreased to as low as 0.25% in 2008. Since 2008, the NDX has had positive returns every year except for 2018, when it finished below the previous year without accounting for dividends. In 2018, interest rates reached 2.5% (the highest level since 2007).

It would come as no surprise if growth stocks start to underperform a more diversified index while interest rates continue to increase in the coming months. However, the last time the CPI YoY was 8.3%, in 1981, the NASDAQ 100 Index had not yet been released.

Tags: Nasdaq 100 Index | NDX | CPI | growth stocks | value stocks | S&P 500 Index

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