In 2023, the Nasdaq Composite rose more than 43%, significantly outpacing the S&P 500, which closed the year more than 24% higher, largely driven by mega-cap tech stocks.
And, despite a more modest 13.7% gain for the Dow, it managed to close the year at all-time highs.
Similarly, the S&P 500 Equal Weight Index, which was flat or lower for much of the year, was also able to eke out double-digit gains, closing more than 11% higher after a strong surge in the winter months. The Equal Weight Index normalizes weighting to reduce the impact of mega-cap names (Alphabet, Apple, Microsoft, etc.) and attempts to more broadly convey the performance of large caps, hence the lagging performance for much of the year.
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Why the performance mismatch? It could be any number of factors. Growth stocks were hit harder than the broader markets in 2022 and the outperformance may have been something of a bounce back. At the same time, the AI narrative fueled significant interest (and investment) as investors looked to the possibilities of the future and the growth that AI and technology could drive.
That investor perception (and the Nasdaq’s composition) is what created those returns and it’s what makes the Nasdaq important to growth investing.
Why is the Nasdaq different? It has a lot to do with the exchange’s origins. Back when the New York Stock Exchange was still the only game in town, the Nasdaq was just a quotation system and didn’t actually trade stocks. As the Nasdaq Stock Market got going, it included lots of stocks that traded as speculative over-the-counter (OTC) issues. But as the Exchange became the first U.S. stock market to start trading online, it attracted a swarm of new tech companies who saw it as a more modern, more dynamic place to list their stocks. Those companies included Apple, Cisco, Dell, Microsoft and Oracle and a host of others.
You can hear an echo of that period when the little report on the radio after the stock markets close calls the Nasdaq “the tech-heavy Nasdaq.”
The Nasdaq is especially important to growth investors exactly for that reason. The exchange’s heavy weighting toward tech and other “riskier” issues lets investors use it as a barometer of how much risk investors are willing to take on at any one time. If the Dow is leading the market, investors are risk-averse, and growth issues are out of fashion.
But when the Nasdaq leads the way, investors’ risk appetite is keen, and growth investors can ramp up their own risk accordingly.
Conversely, when the appetite for risk is low, the Nasdaq tends to lead the way in the other direction, as we saw in 2022.
Cabot offers a variety of advisories that can help you identify stocks that will outperform the market and provide better returns to investors. Click here to find out which growth stocks are on our radar.
Do you prefer investing in growth stocks, value stocks, or a combination of both?
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*This post is periodically updated to reflect market conditions.