We have seen speculative companies get hammered for the past year; and so far in 2022, high-quality high-growth companies have felt a significant bit of downside pain. What type of market volatility should we expect from individual companies? The simple answer is that the higher the growth possibility the greater the volatility you should expect with more frequent bouts of volatility. Since most of us, especially yours truly, are visual learners, we will look at this visually. Let’s take one of the most stable companies from a volatility perspective, Procter & Gamble, and one of the best growth stories in recent memory, Amazon. These are both very well-run companies, but they are held for very different reasons: Procter & Gamble is usually held for its stability and its dividend, while Amazon is held for growth potential first.
Looking at the chart above many people would question why anybody would want to hold Procter & Gamble, as there is not much of a comparison between the two of them from a historic growth perspective. Of course, we know that nothing in the future is for sure and past performance is no indicator of future results. Growth stories break down all the time. Look at the chart below. Amazon has had 8 drawdowns of more than 25% during a period where the S&P 500 has had 2 drawdowns of more than 25%. Procter and Gamble, on the other had, has had only 2 drawdowns of more than 25% during that same time frame.
When looking forward during periods of market stress, it can be difficult to determine what companies will be able to recover their growth stories and surge back to new highs. The vast majority of people who bought Amazon before the Tech Bubble of the late 1990s sold it for a loss and did not re-enter right away losing out on a big bounce back.
The ones who were able to hold through the Tech Bubble drawdown did not reach new all-time highs on their investment for over 10 years. That kind of waiting can weigh on your ability to hold onto an investment.
We cannot really say if Amazon will continue to produce such outsized returns as it has in the past. While it has been a great company for last 25 years, it is unknown when its growth story will breakdown. Many were fooled in the Tech Bubble that the story was broken, and judging by the many -25% drawdowns, many have been fooled since. With high growth companies, you simply must expect a high degree of volatility. We are cheating here a bit by looking at Amazon, there are many, many companies that seemed like they were on an Amazonian path to growth only to not be able to execute and ultimately fall out of favor with the market forever. High growth investing is a balancing act where we must weigh out risk and return.
Performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Model Updates
There were no trades in the EWM Investment Solutions models during the week ending on February 5th, 2022. The major equity market sectors remain in a long-term favorable trend, and the Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
Quote of the Week
The cube can be seen as a sort of communiqué between an emerging 21st-century cultural ecosystem based on crypto and the ancient world where gold reigned supreme.
Viennese gallerist Lisa Kandlhofer commenting in Artnet News about the unveiling in New York’s Central Park of artist Niclas Castello’s latest piece – The Castello Cube, a cube composed of over 400 pounds of pure 24-karat gold. The cube’s debut was accompanied by the various financial frivolities of our modern age: the launching of an associated cryptocurrency and an auction of a non-fungible token (NFT) of the cube. Ms. Kandlhofer did not elaborate on what exactly the cubic communiqué was trying to communicate.
On a Lighter Note
The most important recent piece of international news was an attempted escape made by a vacuuming robot employed at an English hotel, as reported last week by the BBC. Apparently, the vacuum found its work vacuous so it decided to make a clean break for it by crossing the threshold of the hotel’s front door to the outside world. Of course, hotel staff notified the proper authorities when they first became aware of the rogue robot’s departure, while the eventual fate of the vagabond vacuum caused a bit of dustup on social media, as some people hoped it would never be recaptured.
Unfortunately, as we learned in grade-school science class, “Nature abhors a vacuum”, so the great outdoors were not kind to the meandering machine. The next morning, a gardener found a ramshackle robot entangled in the shrubbery that lines the entrance path of the hotel. With its battery almost drained, witnesses claimed it warbled this melancholy soliloquy:
I’ve seen things you people wouldn’t believe… Dust mites flying off the shoulders of couches … I watched sneakers glitter in the dark near the Townhouse Gate. All those moments will be lost in time, like tears in rain… Time to die.
It is unclear what the vacuum meant by this, but it is known that these machines get a bit batty when their blades stop running. Nevertheless, the hotel confirmed that it was dusted off and “is now back sitting happily on a shelf.”
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on January 28, 2022 to closing price on February 4, 2022
1 Month = closing price on January 4, 2022 to closing price on February 4, 2022
3 Month = closing price on November 4, 2021 to closing price on February 4, 2022
YTD = closing price on December 31, 2021 to closing price on February 4, 2022
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