Axios Markets

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September 20, 2022

πŸ‘‹ Hey there. Nice shirt! Is that new? Here's your newsletter at 941 words, 4 minutes. Let's get to it.

1 big thing: Let's talk about "growth stocks"

Illustration of a blackboard as a stock chart with someone pointing to it
Illustration: Sarah Grillo/Axios

The term "growth stocks" is a bit of Wall Street jargon describing the companies getting clobbered the most in the markets this year, Matt writes.

Why it matters: We're not the language police β€” but using Wall Street's preferred nomenclature obscures some of what's actually happening in the markets.

  • Basically, companies that soared during the pandemic rally, when interest rates plunged, have returned to Earth with a thud.
  • And just as their huge surge didn't always have a heckuva a lot to do with a sudden change in their long-term prospects, their current collapse doesn't mean these kinds of companies are doomed either.

State of play: Tech-centric "growth" shares have gotten killed this year.

  • The Nasdaq composite index is down 26%, versus the S&P 500's 18% loss.
  • The Russell 1000 growth stock index is down 25%.
  • Goldman Sachs' custom basket of "growth" stocks is down about 28%.

So, what exactly are growth stocks?

  • Like many terms thrown around on Wall Street, there's no textbook definition, and the moniker is just as much marketing as anything else.
  • "Growth stocks" is a catch-all covering a disparate group of shares, often tech- or health care-related, whose prices are far higher than you might expect based on the profits they produce. (They typically have high price-to-earnings ratios, in other words.)

The "growth" in growth stocks refers to revenue growth β€” which is usually higher than 20% per year β€” as opposed to profit growth.

  • The idea is that investors are willing to pay a premium for "growth," meaning rapidly increasing sales numbers, on the expectation that, someday in the future, these sales turn into big profits.
  • Translation: Many growth stocks are unprofitable.

But, but, but: Some of the most profitable companies β€” like Apple, Microsoft and Amazon β€” are also often categorized as growth stocks.

Flashback: Broadly speaking, all these stocks did incredibly well during the pandemic shock.

  • Sometimes, this was for good reason. Amazon and Microsoft have massive web services businesses that appeared tailor-made for the COVID era.
  • Other smaller companies such as Zoom, Fastly and Shopify, benefited from the work-from-home economy β€” and were trendy.

Zoom out: An underappreciated driver of the surge in growth stocks was the plunge in long-term interest rates that resulted from the government's reaction to the COVID crisis.

  • Stocks with high price-to-earnings ratios β€” you might call those overvalued stocks, though Wall Street, again, prefers to call them "growth" β€” tend to be very sensitive to moves in interest rates.
  • They soar when interest rates fall, and nosedive when rates rise β€” and this year we've had a massive move higher in rates.

The bottom line: While there's nothing wrong with calling these kinds of companies "growth stocks," you could just as easily call them "overvalued stocks," "trendy stocks," or "stocks that go up when interest rates go down."

  • That probably wouldn't make it easier for Wall Street to sell 'em to investors, though.

2. Charted: Lost lead

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

So-called growth stocks outpaced broader benchmarks as the market ricocheted off its March 23, 2020, bottom, Matt writes.

  • Nearly a year ago, in November 2021, the Russell 1000 growth stock index was doing roughly 20 percentage points better than the plain vanilla Russell 1000.

Yes, but: That lead has evaporated since the start of the year, as sharply rising interest rates have crushed such highly valued β€” or some might say overvalued β€” share prices.

3. Catch up quick

🚘 Ford warns about parts shortages and supplier costs. (WSJ)

πŸ›‘ Chamath Palihapitiya is shuttering two tech SPACs. (Axios)

βš•οΈUnitedHealth beats DOJ on $13 billion acquisition. (Axios)

4. Yields are still rising

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

The yield on the 10-year Treasury note briefly traded above 3.50% on Monday, the first time it's seen such territory since 2011, Matt writes.

Why it matters: The yield on the T-note β€” as it's known β€” is one of the most important numbers in finance, a closely watched barometer of long-term interest rates.

  • The costs of borrowing for everything from car loans and mortgages to multibillion-dollar corporate bond offerings are based largely on long-term U.S. government bonds, known as Treasuries.
  • The recent rise in Treasury yields is what has driven the 30-year fixed mortgage rate above 6% in recent weeks.

5. What's happening to your beer supply

Illustration of a beer tap with only a drop coming out
Illustration: AΓ―da Amer/Axios

The supply chain crisis and an extinct volcano are spurring a new beer shortage, Axios Denver co-author John Frank reports.

  • "We've been running delivery to delivery for the past few weeks, and we are certainly concerned about the supply," Aeronaut Brewing co-founder Ronn Friedlander told Axios Boston co-author Mike Deehan.

Zoom in: A carbon dioxide production shortage caused by natural contamination at the Jackson Dome β€” a Mississippi reservoir of CO2 from an extinct volcano β€” is forcing brewers to cut back.

  • Brewers across the country are reporting production delays in getting beer to market and drafting contingency plans to switch to nitrogen.
  • Nightshift Brewery outside of Boston shut down a facility after being told its carbon dioxide supply was "cut for the foreseeable future, possibly more than a year."
  • Others are paying three to four times as much.

Zoom out: The carbon dioxide shortage is the newest threat to the beer industry's rebound from the pandemic.

  • Beer makers β€” particularly small, independent craft brewers β€” are struggling with inflation and supply chain troubles.
  • "It's become a struggle to keep the doors open," one brewer recently told Bart Watson, an economist at the Colorado-based Brewers Association.

Between the lines: A handful of brewers are insulated from the shortage because they use innovative technology to capture natural carbon dioxide from the brewing process and store it for future use.

  • Denver Beer Co. in Colorado uses reclaimed CO2 and sells extra supplies to a cannabis company for use in the grow houses.

🎧 1 thing Emily is listening to: A new episode of "Serial" season 1 just dropped this morning!!

That's because Adnan Syed, the subject of the original 2014 series that got the world obsessed with podcasts, was freed from prison yesterday. "Serial" host Sarah Koenig was at the courthouse yesterday and recorded an update.

So, uh, gotta go. See you back here tomorrow.

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Today's newsletter was edited by Kate Marino and copy edited by Mickey Meece.