Investors Sell Tech And Buy Value On Covid-19 Vaccine Hopes
Investors were still celebrating Joe Biden’s victory when Pfizer’s PFE vaccine breakthrough signalled that a change in the stock market’s leadership could also be on the cards.
Global equities had already been touching record levels ahead of the announcement, yesterday which pushed indexes to fresh highs amid frenzied trading.
But one of the most eye-catching aspects of the rally was the nature of the stocks leading it. For the first time since the coronavirus pandemic took hold, it was no longer the big tech names driving the gains, with the Nasdaq NDAQ one of the few index fallers on the day. Instead, the beaten-up airlines, leisure, and hospitality sectors led the way as investors ditched those stocks that have benefited from the working from home theme.
The big question now is are we seeing a true changing of the guard in the stock market as the prospect of life returning to normality looms larger?
Neil Wilson, chief market analyst at Markets.com, believes the sharp market moves seen yesterday were a “clear signal of a major rotation from growth to value”.
The S&P 500 was up over 1% and the Russell 2000 climbed more than 4%, while the Nasdaq 100 fell over 2%. The moves in European indices were even more pronounced, with the British FTSE 100 up 4.6%, the German DAX rising nearly 5%, and the CAC in France surging by almost 8%. The FTSE, DAX and CAC have all added further gains today.
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Government bond yields rose and gold fell, reflecting the newfound appetite for risk, and trumping off any concerns that a vaccine might prompt U.S. authorities to delay or even cancel further stimulus packages.
At the stock level, the divergence between the winners and losers was stark. Big winners in the S&P 500 included American Airlines AAL , which rallied 15% on hopes of air travel picking up, while Pfizer gained 7.7% after its announcement. In the U.K. the largest risers included airline group IAG, up 25%, Rolls-Royce rocketed 45% and entertainment company Cineworld added 40%.
On the flipside, Netflix NFLX fell 9%, Zoom by 17% and Amazon AMZN lost 5% of its value.
“Is this the start of a major rotation? Quite possibly,” said Johanna Kyrklund, chief investment officer at Schroders.
“We may finally have found the catalyst to spark a move away from the “stay-at-home” stocks that have benefited from lockdown, towards recovery stocks. There would no longer be a need to pay a large premium for the few areas for growth if all sorts of companies return to growth as the economy recovers.”
JP Morgan Cazenove had already been taking profits from its longstanding overweight position in tech in recent weeks, arguing that valuations had become unsustainable. The company has been favoring financials, primarily banks and insurers, which it believes will benefit from general positive market sentiment, but with the added kicker of investors rotating back into the previously unloved sector.
Wilson believes that after such a prolonged run for growth relative to value, “this is a trade that seems to have legs”. He warns that the tech-heavy composition of U.S. indices could see them lag their more value-orientated counterparts. He also cautions that while positive for equities, a Covid-19 vaccine getting closer is “not a straight line up” scenario for markets.
“It will be messy as portfolios rebalance and we can expect more outsize moves in some of the most exposed stocks to the vaccine. But, overall, the landscape for equity markets is favorable,” Wilson added.
Further volatility will be likely around the timing of the Pfizer vaccine and any glitches in its manufacturing and distribution. However, close to 100 other potential vaccines are in testing, meaning others will likely come to market next year.