December 6, 2021
Last week we talked about the flip-flop by Jerome Powell on inflation. He flipped from inflation-denier to inflation-fighter, all over the course of just a morning congressional testimony.
Just like that, the market is now beginning to talk about a March rate hike.
On that note, we'll hear from the Fed next week, where they will likely layout a (new) timeline for that possibility.
As we discussed last week, this new interest rate tightening cycle will be bad news for the high-flying, high-valuation growth stocks — particularly, the "no EPS" stocks.
Many of these stocks that have been valued by Wall Street on a multiple of sales (not earnings) have already taken a beating in just the days since Powell's flip-flop.
The big asset manager, GMO has a good chart that describes the impending fate for these stocks …
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In this chart, we can see the percent of companies in the Russell 3000 Growth Index that have negative earnings. It's a record high. As we can also see, things don't tend to go well at these levels (the red circles).
What else is at a record extreme? The ratio of growth stock performance (outperformance) relative to value stocks.
This all sets up for a rising rate environment, driving money out of growth and into value. The catalyst, a Fed tightening/inflation fighting cycle), is here.
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