By: Tim Fortier — November 11, 2020
The Winds of Change
This week, stocks have rallied on the hope of returns to normal economic activity.
The announcement by Pfizer on Monday, that the company was close to delivering a COVID-19 vaccine sent stocks surging.
However, the performance so far this week has been bifurcated. Technology and stocks related to the “stay-at-home theme” have been trounced.
Here are but a few examples:
Wayfair (W) (-21.85%)
Overstock.com (OSTK) (-20.04%)
Zoom Communications (ZM) (-17.37%)
Camping World Holdings (CWH ) (-14.45%)
Roku (ROKU) (-12.41%)
Clorox (CLX) (-10.62%)
Netflix (NFLX) (-8.59%)
FedEx (FDX) (-5.68%)
Amazon (AMZN) (-5.06%)
Meanwhile, stocks related to a “get out of the house and go back to work” theme have been bid aggressively. This includes industries such as airlines, hotels, retail department stores, casinos, banks, cyclicals, and beaten-down energy stocks.
Oil Exploration (XOP) +21%
Boeing (BA) +19%
Chevron (CVX) +18%
Citigroup (C) +12%
General Electric (GE) +10%
This performance can be easily seen when we compare the performance of small-caps (red line) and the equal-weight S&P 500 ( gold line) to the cap-weighted S&P 500 (blue line) and the Nasdaq 100 index (orange line).
(Click any image to enlarge)
Since 1990, there have been only 20 occurrences of the equal weight index outperforming the Nasdaq 100 index by 5% or more.
Outside of Monday, every, single other day occurred over the span between 2000-2002 which marked very expensive stock valuations, and a decade-long peak in technology stocks.
As you may recall, I recently discussed how a handful of technology names has accounted for all of the performance of the S&P 500 for much of 2020.
At that time I cited a few of the concerns I had for the popular technology names, chief among them were valuation risks and regulatory risks.
In regard to regulatory risks, on Monday, the Wall Street Journal reported that "The European Union is planning formal antitrust charges against Amazon. com Inc. over its treatment of third-party sellers".
If Amazon is found guilty, it could be fined as much as 10% of its annual revenue. This could cost the company $28B.
Amazon is down 13% from its September high and unchanged since July.
Is it Time for a Change?
The rotation going on beneath the surface of the stock market is among the most violent I have witnessed in my 30-plus years of following the markets. At the core is the battle between growth and value themes.
The good news for investors is that money is not leaving the market... it is simply rotating to different parts of the market.
For over a decade, declining interests have fueled a surge in growth stocks.
The COVID-19 pandemic further accentuated this trend with stocks such as Zoom being catapulted nearly 10X in price.
But the move to “normal economy” stocks is bringing with it a resurgence in deep value and cyclical companies.
In the last two years, there have been five significant value sector surges. This week, value has outperformed growth, globally, by over 500bps (the red circle in the image below).
Monday’s 9% outperformance of IWN (Small Value) over QQQ is the largest since the inception of our quant data. And historically, this theme is fitting for post-election periods, as you can see on the table below.
Why This Could be Good News for Investors
A broadening market presents a greater opportunity for investors. For example, popular dividend stocks that have lagged could again become more favored.
When we look at our favorite tool, the US Sector Bell Curve (courtesy of Sector Prophets Pro), we see that virtually every sector of the market is now in bullish control.
Currently, Banks, Leisure, Gaming, Steel & Iron, and Restaurants are our five strongest overall sectors.
To capitalize on this rotation, investors should consider selling capitalization-weighted index funds and ETFs in favor of equal-weight ETFs (RSP). You should also lighten up on technology (XLK), and buy energy (XOP), and other value plays such as banks (KRE and KRB).
Now, there are some caveats to all of this.
First, the pandemic is still raging. The US prepares for the worst, which could be yet to come.
For example, the head of vaccine distribution for Pfizer recently told "60 Minutes" that he didn't want to share how much they have available of the various vaccines.
Simply put... it's not a lot. And final FDA approval is still required.
And logistically, it's not going to be easy to store and distribute a vaccine. (The Pfizer vaccine requires ultra-low temperatures.)
The good news is that both Moderna and Eli Lily have vaccines that also look promising.
Also, we shouldn't expect things to return to the way they were before.
For example, one recent survey shows that peoples' flying habits are set to change drastically for the long-term. Fully eight out of ten airline passengers (83%) are expected to adopt new travel habits once the COVID-19 pandemic is over.
Have a great week,
Guest Editor, True Market Insiders