Growth stocks are struggling in 2022. This fact was apparent last week when I wrote about Buffett is Buying. However, this fact is not surprising. 

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Growth stocks had three good years in a row from 2019 to 2021. According to BlackRock’s periodic table of asset class returns, large-cap growth returned 36.4% in 2019, 38.5% in 2020, and 27.6% in 2021. Furthermore, large-cap growth was No. 1 or No. 2 when ranked by returns in five of the past seven years. Even the best performing 2021 dividend growth stocks tended to be more growth-oriented.

Value stocks were eventually due for a good year, especially since market valuations tend to revert to the mean over time.

Let’s summarize it below with more data, and you can come to your own conclusion about why growth stocks are struggling in 2022.

Nasdaq is Performing Poorly

First, according to Stock Rover*, on a year-to-date (YTD) basis, the Nasdaq 100 and the Nasdaq are the worst-performing of all the indices at (-14.8%) and (-14.5%), respectively. On the other hand, the FTSE 100 and S&P/TSX are up. This point is probably because of the higher relative number of commodity producers in these indices.

Source: Stock Rover*

In the US, the top-performing Index is the Dow Jones Industrial Averages (DIA) at down only (-5.2%). The 2022 Dogs of the Dow are performing even better and are up 6.5%, driven by double-digit returns from Chevron (CVX), Dow (DOW), Merck (MRK), Amgen (AMGN), and Coca-Cola (KO). 

Dividend Power identified some of these stocks as undervalued with good dividend yields in 2021.

• Is Amgen (AMGN) a Good Stock to Buy
• Merck (MRK) – Pharma Dividend Growth
• Chevron (CVX) – A Dividend Growth Opportunity
• 3 Pharma Stocks Yielding Over 3%

Technology and Communications Are Down

The two sectors full of growth stocks are Technology and Communication Services. Both are performing poorly and are the two worst performing sectors YTD. Technology is down (-16%), and Communications is down (-14.7%). Some individual stocks are down far more.

On the other hand, traditional value sectors are doing well. For example, Energy, Utilities, and Consumer Defensive are all up for the year. Additionally, Basic Material and Healthcare are performing well on a relative basis.

Growth vs. Value

Next, if we compare growth stocks and value stocks, we can see a significant difference in performance. In this comparison, we observe the performance difference between the iShares Russell 1000 Value ETF (IWD) and iShares Russell 1000 Growth ETF (IWF). Combined, these two ETFs have more than $110 billion in assets.

The comparison shows IWD is down (-1.2%) while IWF is down (-14.2%) YTD, a significant difference.

Source: Stock Rover*

Why Are Growth Stocks Are Struggling

The primary reason growth stocks are struggling is rising interest rates. The US Federal Reserve has changed its stance from thinking inflation will be transitory to inflation may take longer to control. The Fed views the US as at full employment, but inflation is now 8.5%, the highest since the early-80s.

Inflation is rising due to a combination of tariffs from the prior administration, labor shortages due to low immigration, and the retirement of older workers. In addition, the Fed was arguably late in tapering their US Treasury and Mortgage-Backed Securities (MBS), buys, and increasing interest rates. They only started tapering in late 2021 and implemented the first rate increase since 2018 in March 2022.

It is probable that the Fed will be very aggressive in 2022 as it reduces its balance sheet and implements additional rate increases. This change will likely put extra pressure on growth stocks, which will struggle further in 2022.

Final Thoughts on Growth Is Struggling

Despite the challenges faced by the stock market, some sectors and value stocks are performing well. Dividend growth stocks are performing well too. According to our watchlists on Stock Rover*, the 39 Dividend Kings are down about (-4.7%), and the 65 Dividend Aristocrats are doing better at (-2.2%).