Last year, all three major indexes slipped into bear territory. As they started rebounding from those lows, one question was probably on your mind (and on mine too): When will the next bull market arrive? It's a logical question, since bear markets always lead to these much-anticipated times of market growth. We haven't reached the bull stage yet, but the good news is that the major indexes have rallied this year -- so they may be on their way.
Growth stocks such as Amazon, Alphabet, and Tesla have led the gains -- no surprise, since growth stocks often shine during rising markets. That's because favorable market and economic conditions often make their operations easier and boost their revenue. So, on this note, should you pile into growth stocks in December -- and bet on more gains in the new year? Let's find out.
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Hoping the momentum will continue
First, it's important to say you shouldn't buy or avoid a particular stock or type of stock just because it's gained recently. Some investors buy these stocks hand over fist, hoping the momentum will continue. Others do the exact opposite, convinced the party is over and the stock price has no place to go but down. These techniques could lead to losses or a missed opportunity.
So what should you do? Start by looking at each stock individually, with a focus on the company's track record, financial health, and long-term prospects. Then consider all that in relation to the current valuation. In some cases, a rising stock -- such as Amazon today -- offers strength in each of those areas, so it represents a buy in spite of a recent gain. In other cases, a particular gaining stock may look overvalued -- and you may want to avoid it, at least for the moment.
You may also be wondering what to do about the growth stocks that have missed out on this year's rally. There are plenty of them -- and two of my favorites are Etsy (ETSY 0.34%) and Chewy (CHWY 2.99%). You may ask: If they didn't take off during this rally, will they ever? It's key to give many of these younger growth stocks some time.
When the market starts recovering, growth stocks we know well, like an Amazon or an Alphabet, may be among the first to gain. Companies that are earlier in their growth story may take more time to rebound and then rise, and like Etsy and Chewy, they may remain in the doldrums even as the companies announce favorable news during the earnings reports.
Etsy's active buyers, Chewy's profitability
For example, Etsy recently reported a return to growth in gross merchandise sales -- and active buyers on the platform for handmade goods reached a record high. As for Chewy, the pet supplies e-commerce company became profitable last year and has maintained profitability this year too. Still, Etsy and Chewy shares have dropped 32% and 50%, respectively.
But this wouldn't discourage me from buying these growth stocks. If these companies' earnings continue to progress, their share prices should eventually take off. So, if you get in right now, at today's valuations, you may have a lot to gain.
Now let's get back to our initial question: Should you buy growth stocks in general as the market rallies? This depends on your investment style more than anything else. Though we may be heading toward a new bull market, and growth stocks tend to outperform in that sort of environment, you shouldn't design your portfolios according to market phases. That's because these phases come and go -- and you should invest for the long term.
All this means that right now, if you're a cautious investor, you still may want to pick up a couple of growth stocks -- but you shouldn't go all in on these players.
However, more aggressive investors may find that now, in December, is a great time to really load up on some of their favorite growth stocks. There are plenty of bargains around, you may gain in the near term if the momentum continues -- and you're reinforcing the backbone of your long-term portfolios. So, for you, growth stocks are a top buy right now.
