Growth Investors Aren’t Scared
It’s safe to say this correction hasn’t gone the way value investors envisioned it would when they expected one in late August. Large cap growth firms have underperformed the market, but small cap value has still fallen. This has been a wide reaching correction. Tech stocks are no longer the flight to safety that they were this spring and earlier in the summer. However, there has been a major sector and factor rotation in this correction.
Growth investors actually aren’t that miffed by this correction unless they own triple leveraged ETFs as shown in the chart below. Triple leveraged Nasdaq 100 has had the largest inflows ever, while the normal Nasdaq 100 index has had the largest outflow since February 2018. QQQ was in the top 5 in volume and flows this week.
No leveraged ETP has ever been this big or popular. That makes sense because the triple leveraged Nasdaq hit a 10,000% return at the peak which was the first time a fund ever went up that much.
As you can tell with that fund flow, growth investors are taking this volatility in stride. They are doubling down on their picks. This makes sense because they are still up hugely. Value investors are more sensitive to declines for 2 reasons. Firstly, their stocks haven’t done as well as growth stocks this summer.
Secondly, they thought a correction would bring about a change in market leadership. We’ve seen a few days in July and August where growth stocks fell and value stocks rose. Now they are falling together. This isn’t what value investors signed up for.
As you can see from the chart above, value has underperformed growth by more than it did in the nifty 50 bubble in the 1970s and the tech bubble in the 1990s. Some people are calling this the FAANG bubble, but many disagree. Apple, Netflix, and Amazon are bubbles, but the others aren’t.
This is a cloud and EV bubble rather than a FAANG bubble. Some of the cloud and EV stocks will fall 90%. That’s a real bubble. If Microsoft gets caught up in the carnage and falls 30%, that wasn’t a bubble.
As you can see from the chart below, the top 5 positions in the Russell 1000 growth index hit 39% share of the index at the end of August which is higher than the peak in the tech bubble. Apple hit 12.2% of the index. The chart emphasizes that the top 5 positions in the index have a weighting above 25%.
This isn’t new. It’s just interesting that the SEC restricts large cap funds from having that level of concentration. If it wasn’t for this restriction, we might see even more money concentrated in these big tech names. It’s hard to believe even more money could go to these names other than it coming from mania level speculation.
Nikola Crashes Again
The Nikola situation is interesting because after the short report came out on Thursday, the chairman reacted exceedingly poorly. If you had to teach a class on how not to react to a short report, this would be an example. There are always questions lingering after short reports come out, but sometimes they only hurt stocks for one day. Their chairman posted on social media that he would respond to all the allegations and then did nothing. If he would have just ignored the report, it would have been better.
This terrible handling of the report caused Nikola stock to fall 14.48%, putting it down 35.8% in the past 3 days. It’s below where it announced the GM partnership. Regardless of whether the chairman responded correctly, it’s extremely damning evidence that there are pictures of a wire under the semi truck they had on stage since it implies the truck couldn’t run its screens without outside power.
Another allegation is that they pushed the truck down a hill for the commercial. Either way, the entire company hasn’t had sales yet. Just on valuation alone, it’s too high. There is no bull case for this stock at any price near where it is at now.
Stocks End The Weak Mildly Negative
S&P 500 rose 5 basis points. Stocks were mildly negative because most stocks actually fell; Nasdaq was down 0.6% and the Russell 2000 was down 0.7%. Small cap value investors were expecting a party when growth stocks fell, but they were rewarded with losses as the index fell 0.42% on Friday and is down 6.21% since August 10th.
Regional banks actually increased 0.54% and energy was up 0.1%. However, ExxonMobil was down again as it fell 0.27%. The stock is on a 9 day losing streak. Personallly, I think it’s a buy.
Cloud index was down 1.73% as Shopify fell 2.11% and ServiceNow fell 1.56%. Tesla was up 0.37%. Somehow in the midst of a correction, Tesla is on a 3 day winning streak. That’s the power of the Battery Day hype. It doesn’t hurt that Nikola has crashed and burned. Nikola was never a real company, but some thought of it as competition for Tesla in the future. Worst sector was tech which fell 75 basis points and the best was the industrials which rose 1.39%.
Where Is The Growth Selloff?
That's an excellent question because this has been a relatively normal correction outside of the fact that the Nasdaq fell 10% in 3 days which was the fastest correction ever. You’d expect the high beta tech stocks to fall more in a normal correction. In that case, this is weird for this year because growth previously acted as a flight to safety.
However, value investors are still wondering when the great rotation will occur. Many of the cloud stocks and practically all of the EV stocks are extreme bubbles. Those don’t go away with a 20% correction. It will be interesting to see if growth sells off while value rebounds next week.
Best catalyst for a growth selloff would be higher yields, but we haven’t gotten those. Another catalyst would be Abbott’s tests actually working. We will get more information on that later this month.