Is it time to buy the dip in growth stocks?
Is it time to buy the dip in growth stocks?
The risks and opportunities that lay ahead.
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The unexpected rise in long-term yields back in February spooked investors and many high-growth names took a tumble from February to May. I wrote about how market indices were making all-time-highs while growth stocks were taking Mike Tyson-like punches to the face. Although a lot of these names have bounced from the lows, they are still not where they were at peak, and could possibly continue to run. Nobody knows what will happen tomorrow, but today I want to look at the economical environment and outline some opportunities and risks.
Does anyone know what they’re doing?
The recent June rally in high growth names can be attributed to somewhat of a pullback in long-dated rates. Let’s look at the 10-year note.
In my opinion we are in uncharted territory for a lot of metrics. Is inflation transitory or not? The Fed is saying no rates changing until 2022 and 2023, while many experts are saying we could expect them sooner. Even then we are talking only a few basis points, will the market get spooked yet again by a .25% increase in rates? It certainly shouldn’t, but that is something we cannot predict. However, looking at longer-dated yields, should they continue higher this could cause some headwinds for growth stocks as it did earlier this year.
Which leads me to ask, do any of these “experts” you hear on the news actually know what they are doing? If you recall earlier in April inflation worries were the biggest headline and treasury yields were soaring. Growth stocks were being hit day after day. How have the headlines changed now? Well, it seems inflation wasn’t as big of a deal as they thought and now growth stocks have recovered. If you followed what these “experts” were saying your account would be blown up.
Things to watch
IMO what we need to keep a very short leash on and monitor closely are the 10 and 30-year treasuries. It has been said that they are “predictive” of where the market may head to next and this was obvious back in April when we saw a sharp uptick. It goes without saying that the market is also paying very close to attention to any hints of tapering QE. Here’s a look at the Fed’s balance sheet.
When the Fed’s balance sheet stops expanding it’s possible we’ll get another pullback in market indices and some risk-off in high-beta stocks.
What’s my play?
Mr Market is at all-time-highs with a lot of uncertainty around the corner. Personally, I am taking profits in some of my names that have over-performed in the last couple months. My inflation plays are still on the table and I will be holding those until I see clear signs that commodity prices are under control, which with this recent pull-back they still are not.
I’m staying invested in my stock picks that are the best in their industry. History has shown us that until QE comes to an end the party will continue. We must pay attention over the next several months at what the Fed is suggesting, is the music finally going to stop or do we move higher. There are no guarantees in this business, but for the moment my opinion is we continue our upward trend.
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