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.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
