Exxon is sexier than Tesla

and why growth STONKs don't always go up.

Growth stocks got decimated last week.

Chamath Palihapitiya’s portfolio was down almost $2 billion.

If you thought STONKS only go up, check out what’s happened to Tesla:

It’s down 30% over the last month.

Institutional investors are ditching growth stocks for value stocks.

This means the Square’s and the Shopify’s are less appealing than Berkshire Hathaway’s.

Why?

It all started with the stellar jobs report.

The economy is recovering faster than people expected, and bond yields are rising.

Rising bond yields have triggered sharp falls in the Nasdaq, which is packed full of flashy stocks that soared when returns on bonds were ultra-low. Tesla had tumbled more than 30% over the month to Friday, with Ark's Innovation ETF down around 26% and Amazon off by roughly 12%.

Rising bond yields to growth stocks are like garlic to vampires.

Investors are betting that the economy is going to start growing faster in 2021. This is triggering fears of inflation.

Let’s breakdown why rising bond yields are bad for growth company valuations:

  1. Investors use Bond yields and inflation to value companies. If borrowing rates and inflation are expected to remain low, hypergrowth companies' returns are much more attractive. The inverse is also true.

  2. Investors are worried that the fed won’t intervene. If the fed stops pumping money into the economy, rates will continue to increase, putting further pressure on growth stocks. If you can earn a decent return from safer investments like bonds, why bother with riskier assets like SPACs.

  3. Investors don’t like surprises. The rapid rise in bond yields caught everyone off guard and caused growth stocks to plummet.

All of this is leading to sector rotation.

Financials, commodities, and energy stocks are ripping while growth stocks are crashing.

Compare this chart of Berkshire Hathaway to the previous one for Tesla:

What about this one for Exxon Mobil:

I never thought I’d see the day where Exxon had a sexier chart than Tesla.

If you’re interested in learning more about sector rotation, I would highly recommend following J.C. Parets.


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Bardia