It was a modestly negative day in the stock market for much of Thursday. As of about 2:30 p.m. ET, the Dow Jones Industrial Average was flat, while both the S&P 500 and Nasdaq Composite were firmly in the red. The Nasdaq was by far the worst performer of the three major indexes, down by 1.7%.
However, some of the fastest-growing companies in the market continued their recent slump and were dramatically underperforming the broader market. Cybersecurity giant CrowdStrike Holdings (CRWD -2.23%) was down by nearly 5%, while database software companies Datadog (DDOG -3.26%) and MongoDB (MDB -1.49%) were down by 5% and 8%, respectively.
There isn't any company-specific news weighing these stocks down today. Instead, the move seems to be a continuation of the slump in high-growth stocks that has been going on for weeks.
In a nutshell, high inflation and rising interest rates are generally negative catalysts for high-growth stocks, and for a few reasons. For one thing, rising rates make lower-risk assets (Treasury bonds, for example) more attractive, so it tends to cause a rotation out of riskier high-growth names like these.
Additionally, rising rates can dramatically increase the cost of capital for businesses like these, and inflation can generally slow down economic activity and can cause businesses and consumers to pump the brakes on technology spending.
Recently, investor expectations for interest rates have dramatically increased. We recently learned that the consumer price index, which is widely considered the best gauge of inflation, grew by 7% year over year in December -- that's the fastest inflation since 1982. What's more, Federal Reserve Chairman Jerome Powell recently indicated that the central bank was prepared to act aggressively with rate hikes to help bring inflation under control. Most voting policymakers see at least three 25-basis-point (0.25%) interest rate hikes in 2022, and it wouldn't be surprising if even that isn't enough.
One important takeaway is that none of this has anything to do with the underlying businesses of these three companies. There's still a growing need for cybersecurity, analytics, and database solutions, and rising interest rates aren't likely to change this.
To be sure, these stocks may remain under pressure until there's more clarity surrounding interest rates and inflation, and if elevated inflation causes a meaningful pullback in corporate spending, we could even see their growth rates slow temporarily. However, there's no indication of any slowdown in their businesses at this point, and with earnings season right around the corner, we'll soon get a look at each company's latest numbers.
From a long-term perspective, however, nothing has happened that changes the investment thesis. Therefore, now could be a smart time for patient, long-term investors to take a closer look at these and other beaten-down growth stocks.