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THE GREAT STOCK MARKET ROTATION:
According to experts, we’re in a transitionary period where money might begin shifting AWAY from TECH…and into THE VALUE sectors, as investors try to capitalize on rising rates, and find new opportunities for future growth.
An Investment Manger with Morgan Stanley recently said that, “when we look to 2022, there should be more of a debate about valuations and the direction of inflation. That’s great for value stocks and cyclical companies, but not for tech, once rates start to more definitively move higher.”
And Goldman Sachs noted that “although many of these high growth companies with little to no profits could have bright futures, their current valuations are dependent on long-term future cash flows. That makes them especially vulnerable to the risks of rising interest rates or disappointing revenues.”
They explain that GROWTH STOCKS trade on the EXPECTATION that strong future earnings will eventually justify their valuations. BUT, as interest rates increase…those higher yields eat into future profits…and, as other investments begin offering higher returns…growth stocks look less attractive, in comparison, leading to a decline. The last time a strong economic recovery coincided with relatively high inflation, between 1982 and 1984…value outperformed growth by 25%.
But the RISK…is that things like this are NEARLY IMPOSSIBLE to time. Even though there was talk about a GREAT ROTATION in late 2020…and some value stocks DID increase…it was less than expected because of new Delta Concerns, and supply chain issues affecting the manufacturing of new products. That led to many growth stocks CONTINUING their increase…even though it was predicted that they’d begin to slow down.
We also don’t know if tech will just CONTINUE dominating and leading the way, even though the Goldman Sachs CEO says to prepare for “lower returns over the next few years.” As he explains, “We would expect that we’re not going to see the same rate of returns in equities and many other assets over the next few years that we’ve seen over the last couple of years.”
It’s good information to know, and this will help you understand how markets are impacted by interest rates over time….but, I wouldn’t go ALL IN either way…it’s just important to diversify, make sure you’re not entirely invested in one sector, keep buying consistently…and, no matter what…SMASH the like button 🙂
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