Key takeaways
- History has tended to reward those who maintain an unwavering long-term strategy.
- The strength and strategic savvy of innovative sectors served them well.
- Innovative companies have already begun looking to the future.
How innovation may drive growth stocks through volatile times
It’s human nature for investors to lose focus after an eye-popping market drawdown. As previous gains slowly slip away, investors often can’t resist trying to outmaneuver the market. But that could be the wrong move. History has tended to reward those who maintain an unwavering long-term strategy.
This resilient, but often challenging to implement, approach has worked particularly well when investing in sectors with a track record for innovation. Companies in these sectors are accustomed to adapting to a rapidly changing world by constantly developing new technologies and groundbreaking solutions. The recent performance of the NASDAQ-100 Index (NASDAQ: NDX)*, demonstrates this potential to handle periods of volatility better.
In the weeks during which the coronavirus outbreak became front-page news (February 19 through March 25), NDX had slightly outperformed the broader market, as measured by the S&P 500 Index. The NDX returned -22.33% during this period but the S&P 500 Index returned -26.38%. In fact, NDX’s one year return as of December 31, 2020 was 48.88% while the S&P 500 returned 18.40% (USD) 1. The NDX outperformance has been aided in part by two important factors.
First, NDX didn’t have significant exposure to the broader market’s worst-performing sectors: energy and financials. The NASDAQ-100 doesn’t include financial services companies and has limited exposure to the energy sector and was mostly immune to the market’s more than 30% drawdown.
Second, the rebound in NDX is most likely attributable to the strength and strategic savvy of the innovative tech, biotech and communications leaders that are in the index. When an unprecedented challenge like a worldwide pandemic hit, these well-positioned companies were prepared. Given that this particular crisis brought a dramatic increase in virtual vs. in-person experiences, many of the NASDAQ-100 companies, with their digital first business models, were able to thrive.
It’s not enough to just bounce back, the innovative companies that make up NDX have already begun looking to the future with an eye on how they can continue to pivot and sustain the cutting-edge innovation that serves as their principal driver of growth.
