There are a lot of chatters about the coming inflation and higher interest rates as the reasons for the recent NASDAQ selloff.  Wall Street has been talking about the rotation from high priced growth stocks into value stocks which are cyclical and more closely connected to the state of the economy.  

We went back to the recent inflation cycle (2002-2007) to examine how the commodity stocks vs indices and growth tech stocks performed.  Soon after China joined WTO in December 2001, oil bottomed in 2002 as the Chinese oil consumption increased.  2002-2007 was a major inflation cycle which was caused by the global demand of commodities and the US housing bubble.

Here is the table of the performance comparison in that cycle:

You can see that the growth indices NASDAQ 100 and NASDAQ out performed S&P 500 and the DOW by wide margins.  Chevron being the right stock in the inflation cycle, it out performed the market by a very wide margin, yet the super growth stock Apple out performed everything by an even greater margin.  This chart should demystify how growth stocks would perform in an inflation driven cycle.  Growth stocks are expensive for the right reasons because they are growing and taking market shares.  Remember Blackberry was eaten alive by Apple?  Chevron out performed the market, not because of its innovation, but simply because of the demand driven by the inflation cycle.  As soon as the inflation cycle died down, Chevron died like a dog while Apple continued to out perform the market because of its growth engine.

That being said, we are not rotating from growth to value.  We will continue to add if growth stocks show further weaknesses.

Now let’s turn our attention to the bubble talk for a moment.  The NASDAQ has been frequently compared to the DOTCOM bubble because it’s so expensive.

Here are the few differences when compared to the DOTCOM era:

  1.  The DOW peak in Jan 2000 with the bull market narrowing while the NASDAQ rallied into March 2000.
  2. Now the DOW is rallying with the bull market broadening while the NASDAQ taking a back seat.
  3. The DOTCOM tech stocks couldn’t make any money, only an internet concept such as PET.COM.
  4. Today’s new batches of tech stocks are making real money and the business models are for real.
  5. The NASDAQ was 157% over its 200-week moving average in Mar 2000, and it was 70% over its 200-week moving average in Feb 2021.

For the above reasons, we believe the bubble talk is premature.  The bull market cycle has ways to go.  We view this NASDAQ correction as a very good opportunity, rather than the start of a bear market.

Below is the DOW weekly chart.  You can see the DOW finally broke out the old top channel line with 32980 being the temporary resistance.  The other indices broke out the similar top channel line a long time ago.  So this is very good news, the DOW is joining the party!

The NASDAQ had an inside week last week, meaning the price traded within the range of the previous week.  An inside bar typically shows indecision, meaning the NASDAQ hasn’t made up its mind on reversing the weekly cycle bottom.  But the 10-year treasury yield made a higher high and the NASDAQ didn’t make a lower low.  The market probably is getting used to the rising rates!

Again, we are bullish and view this correction as opportunity to add more exposure to growth stocks.