Love him or hate him, CNBC personality Jim Cramer commands a lot of attention. And last Thursday, he did something many investors are saying could be a sign that beaten-up hypergrowth tech stocks have bottomed.
Now, a lot of folks are saying they’re ready to rally!
Specifically, in a Mad Money segment about the conceptual growth stocks in Cathie Wood’s Ark Innovation ETF (NYSEARCA:ARKK), Jim Cramer poured a bottle of Cutty Sark whisky over little animal cutouts with ticker symbols of Ark’s holdings, like Robinhood (NASDAQ:HOOD), Teladoc (NYSE:TDOC), and Zoom (NASDAQ:ZM). The whisky was meant to symbolize the anti-Ark ETF, the Tuttle Capital Short Innovation ETF (NASDAQ:SARK).
The big idea, of course, was that hypergrowth tech stocks will drown as U.S. Federal Reserve Chairman Jerome Powell raises interest rates in 2022. Indeed, Cramer stated as much. He said that he’s been investing for 40 years and that his experience has taught him that hypergrowth tech stocks struggle during rate-hike cycles.
Many on social media have said that Cramer’s hyperbolic actions are a sign of capitulation and could be a contrarian indicator that beaten-up hypergrowth tech stocks are ready to bounce back.
Indeed, since that segment, the Ark Innovation ETF has rallied nearly 15% in just two trading days.
So did Cramer call a bottom in the hypergrowth tech sell-off? Have we reached capitulation? Is it time for these stocks to roar back to life?
What the Data Says
The consensus knowledge among Wall Street veterans is the same as Cramer’s mindset — that long-duration growth stocks do not work in rate-hike cycles because higher rates pressure valuations.
More importantly though, we would like to highlight that the data actually does not support this conclusion.
Rather, the data tells us that growth stocks historically do just fine in rate-hike cycles.
Specifically, there have been four rate-hike cycles since 1990. In three out of the four cycles, growth stocks outperformed value stocks. In two out of the four cycles, growth stocks outperformed the S&P 500. On average, across all four cycles, growth stocks posted the best returns.
Average returns for the S&P 500 during the last four rate-hike cycles? About 10%. Value stocks? Just 8%. Growth stocks? A surprising 13%.
In other words, while Finance 101 tells us that higher rates should pressure valuations and more significantly pressure growth stocks, the data shows that growth stocks actually perform better than value stocks during rate-hike cycles.
The Reality for Tech Stocks
Why the stark difference between textbooks and reality?
In reality, the stock market is a forward-looking discounting mechanism. Investors look to the future and price things into financial assets before they happen.
The Fed normally telegraphs rate hikes and the course of monetary policy well ahead of time. Therefore, investors have ample time to price in rate hikes before they materialize. So the “valuation reset” on growth stocks due to rate hikes usually happens before the rate-hike cycle even begins.
Once the cycle does begin, growth stocks are already priced for higher rates. Thereafter, it is up to earnings — not rates — to drive growth stocks either higher or lower. Normally, the earnings power is there, so growth stocks move higher even in the face of rising rates (which they are already priced for).
That’s why we think it is time to buy hypergrowth tech stocks.
These stocks have already crashed and are repriced for higher rates. Once the Fed rips the proverbial bandage off in March and we officially enter a rate-hike cycle, the enormous burden of anticipation will be lifted off these stocks. And subsequently, they’ll rally like there’s no tomorrow.
You know the old saying, it’s best to buy stocks when there’s blood on the street?
Well, there’s blood on the streets in the hypergrowth tech world. And that’s why right now is the best time there’s been in the past decade to buy tech stocks.
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