Trends in investing are always changing. One year, tech stocks are in. The next year, they’re out. Then another year, energy stocks are all the rage… until they decline in price and 90% of investors start selling them. It is what it is. Nevertheless, these investing trends usually last at least a few months, so there’s time to change ones’ strategy in response to them. In this article, I will explore the shift from growth investing to dividend investing that took place in 2022 and the abrupt reversal that took place this year.
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Growth stocks fell out of favour in 2022
In 2022, growth stocks (especially tech stocks) fell out of favour after an entire decade of beating all the benchmarks. These stocks got expensive near the end of the COVID-19 bull market, and began to decline in price. Once the Federal Reserve and Bank of Canada started hiking interest rates, a full-on bear market got underway.
Shopify Inc (TSX: SHOP) is a good case study here. The company’s stock rallied 6,031% from its IPO to its high in 2021. In November of that year, the stock started tumbling. Then in 2022, when interest rate hikes got underway and SHOP’s growth slowed down to 13% (sales had been growing as rapidly as 90% year over year in 2020 and 2021), investors started questioning the once beloved name. This was all a bit much for a stock trading at 60 times sales, so naturally Shopify took a beating in 2022. It fell about 70% from top to bottom. SHOP has since started climbing again, as it has accelerated its revenue growth to 25% and become profitable. Still, it’s nowhere near re-taking its COVID-era highs.
Dividend stocks took a dip in 2023
When growth stocks crashed in 2022, dividend stocks had a bit of a moment. That year, the Dow outperformed the NASDAQ, as sectors like energy and utilities rallied. It was a good time to be in dividend stocks. The only thing is, the trend swiftly reversed this year. When oil prices fell and ChatGPT got people interested in tech stocks again, dividend stocks started to tank. Also, a string of bank failures in the spring caused trouble for the financial sector.
A good example of this is Bank of America (NYSE: BAC), a U.S. bank stock that declined quite precipitously in the banking crisis that took place this past Spring. Even before the crisis started, it had been in a downtrend, as its 2022 earnings growth was weighed down by very poor results in investment banking. Bank of America started off the year at $33.50 and fell as low as $25 by late March. The stock recovered much of its lost ground in the ensuing months. Today, it trades at $31. Still, it has not recovered to the level it was at at the start of the year.
Foolish takeaway
As the preceding paragraphs show, stock market trends come and go. What tends to stay the same is the fact that quality companies with growing earnings and sensible valuations tend to do better than average when times are tough. Perhaps, then, the key is not to try to predict trends at all, but have a diversified portfolio made up of high quality assets.
