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Recent Market Sentiments
Recently, we’ve seen a sell-off for tech stocks, namely Apple, Tesla, where many would see it as attractive buy zones, while some would hope for its prices to fall further in the midst of a temporary bear market. The recent market sell-off was mainly due to the surge in US Treasury yields, which investors became concerned with the rising inflation to come. So how does the US Treasury Yields affect the price of the stocks?
US Treasury Yields
Treasury yields are basically the interest the government pays from borrowing money from investors. In simple terms, it is the interest rate you receive from lending money to the government through debt instruments such as treasury bills and treasury bonds. These treasuries are categorized as a low-risk investment since it is backed by the government. The yield rate is extremely important as it can reflect the state of the economy.
Effect of Covid-19 Vaccine & Fiscal Stimulus
With the breakthrough of Covid-19 Vaccine and US President Joe Biden’s US$1.9 Trillion fiscal stimulus, there has been a rise in expectations that the economy will bounce back. Many believe that vaccine is the start of the economy recovery as Covid-19 is now better managed. People also believed that high rates of inflation would kick in, which pushed yields higher. When inflationary pressure begins to pile up, people will dump equities and flow back into safer assets such as bonds. As a result, equities prices will fall.
Tech Stocks Took a Beating
As mentioned, we’ve observed many hot tech stocks sell-off in the past weeks and months. This is because of the nature of the stock, where these tech stocks are mostly growth stocks. These tech stocks/ growth stocks are usually valuated using Discounted Cash Flow (DCF). DCF uses a formula to calculate the present value of an expected stream of future cash flows. With the expected higher interest rate in the future, this would result in a lower present value of the investment. These tech stocks/ growth stocks have rapid growth assumptions built into them, and this high interest rate will further push the present value down.
Growth Investing vs Value Investing
Stocks that have substantially higher growth rate compared to the average stock in the market.
Stocks that are undervalued, which also means that they are being traded at a value lower than their intrinsic value.
Simple comparison between Growth and Value Stocks
|Growth Stocks||Value Stocks|
|Price||Usually Overvalued||Currently Undervalued|
|PE Ratios||High or Above Average||Low or Below Average|
|Companies||Can be leaders in their industries||New and yet to be recognised by investors, or fallen but yet still have good fundamentals|
|Risks||High volatility especially on negative news||Might not appreciate as expected|
|In Bull/Bear Markets||Usually outperform in bull market||Usually outperform in bear market|
So what is the strategy? Growth Investing or Value Investing?
It is one’s sole preference to decide to invest in growth or value stocks. As the stock market changes unexpectedly, it might be strategic to invest in both. It is always good to diversify your risks because you will never know when the bull market is going to end or when the bear market is going to appear.
In bull markets, growth stocks tend to outperform and generate high returns for you, but once the bear kicks in, you can expect to see a drastic fall in the prices of these stocks. On the other hand, in a bear market, you will be surprised to see your value stocks outperform the market, but you might probably not see them performing during a bull run. Ultimately, fall back to your own risk tolerance and also layout your investment goals. This will better paint you a picture of which strategy would better fit you.
Personally, during the past month, I’ve sold off some growth stocks and picked up some value stocks to balance out my entire portfolio. As we enter an uncertain stock market, I personally prefer to hold both growth and value stocks to spread out the risks involved. The sell-off for tech stocks had taken some profit away from my portfolio, but nevertheless, I still expect a recovery soon from this correction.
As school has been really busy, I’d like to apologise to those who have been waiting for a new post in awhile. Submissions and tests have been flooding my past weeks and hence I was unable to update my blog as frequently as before, and I hope you would understand. Thank you for your patience and support, and as promised I’d still post when I’m able to take some time off my studies. I really appreciate your spontaneous support and do stick around for more interesting contents !