Stocks generally fall into one of three broad categories: Value, income, or growth. Value stocks are those priced below their intrinsic value. Income stocks provide reliable dividends that investors can rely on for supplemental income. Growth stocks are rapidly growing companies whose revenue is expected to increase much faster than the rest of their industries.
This year has been less than ideal for most investors, but especially so for those focused on growth stocks. I'm not worried, though. I firmly believe that growth stocks will rebound, and here's why.
The short end of the stick
During bear markets and other down periods, growth stocks tend to get the short end of the stick. Let's look at the S&P 500, which is used to gauge the overall stock market's performance, and the S&P 500 growth index, which is composed of the growth companies in the S&P 500, as examples.
Both the Vanguard S&P 500 ETF (VOO +0.98%) and Vanguard S&P 500 Growth ETF (VOOG +1.23%) are exchange-traded funds (ETFs) of the respective indexes, and here's how they've performed so far this year.
Data by YCharts.
It's been a rough year for the S&P 500, but it's been a really rough year for the growth stocks within the S&P 500 and the stock market as a whole. However, that shouldn't come as a surprise.
Investors looking for cover
Stock prices are a function of supply and demand -- the more people selling a stock, the more the price drops, and vice versa. When broader economic conditions are bad, it makes sense that investors would lean away from growth stocks (thereby decreasing the share prices) and rely more on defensive stocks. Defensive stocks are companies with stable and consistent earnings, healthy balance sheets, and products and services that sell regardless of the economy. It's an investing trifecta during uncertain times.
As an investor, it's a lot easier to trust that a company like Procter & Gamble (PG 1.09%) or Walmart (WMT 1.73%) will make it through a rough economy relatively unscathed than it is to trust a younger, less battle-tested growth company operating in a highly competitive market like biotechnology.
People will always need groceries, diapers, cleaning products, and the like. But when money is tight, they can do without the products or services often offered by growth companies.
Brighter days are likely ahead
Just as growth stocks take more of a hit during down periods, they often reap more benefits from bull markets. When stock prices are rising, investors don't mind investing in companies based on their future potential because they're making money along the way. It's a bit harder to stay focused on the future when you're seemingly "losing" money as you make your investments.
After the early 2020 bear market due to the COVID-19 pandemic, the stock market went on an unprecedented rally until early January 2022. People found themselves with extra income to invest, and guess which type of stocks many flocked to? Growth. During that bull run, the Vanguard S&P 500 Growth ETF noticeably outperformed the Vanguard S&P 500 ETF.
Data by YCharts.
By no means should you assume growth stocks will outpace the overall stock market just because it's happened previously, but the historical results should be a positive sign for investors. At some point, the economy has to recover. Nobody can say for sure when it'll happen, but there's no reason to believe it won't happen at some point. And when it does, investors will feel more comfortable embracing growth stocks and the (potentially lucrative) uncertainty that comes with them.
Instead of shying away from growth stocks, use this time to your advantage by grabbing some great companies at a "discount" right now -- especially if time is on your side. You'll likely be glad you did.
