Published November 13, 2020
Markets this week delivered another burst of buying to the long-lagging value sectors of the market, notably the finance and energy sectors. The buying came on positive test results from a coronavirus vaccine. The chart below shows the correlation of certain stock market sectors to bond yields. Bond yields rise during periods of economic expansion. Yields have begun climbing as investors look past the current surge in coronavirus cases to a broader economic recovery in the first half of next year. As we see below, the market sectors that are correlated to falling bond yields (red line) have risen, by far, to their highest point in 20 years. Those sectors sensitive to rising bond yields have declined in value. The resulting gap is extraordinarily large. That wide gap suggests that a continued rise in bond yields could bring about a sharp shift in investor preferences toward the value/cyclical sectors, like banks and energy, and away from the more growth/defensive focused areas like technology.
The second chart confirms the possibility of this shift; this time noting which sectors outperformed during this week’s announcement of positive vaccine news. Again, the energy sector, which has lost almost half its value during this year’s pandemic, is expected to rebound as a vaccine becomes a reality. Other cyclical sectors, industrials and materials, are likewise expected to outperform as the economy heals. While technology stocks and the FANGMA trade will, no doubt, continue to do fine, the chart above tells us that these sectors are substantially overvalued by comparison to these lagging sectors.
Of course, we remain quite a ways from distribution of a vaccine and a full economic recovery. The market’s recent embrace of that narrative may be premature. Or, investors might stick with this nascent shift in sentiment, push more money toward value sectors, and close the yawning gap in the chart at the top. That could be the story of the market next year.
Stocks opened the week sharply higher on positive results from Pfizer (PFE) regarding their coronavirus vaccine. The Dow Jones Industrial Average (DJIA) leapt +5% at the market open. It was an amazing trading session. Money shifted massively from stocks that were seen as beneficiaries of work-from-home and other pandemic-related themes. The recipients of the money flows were the previously lagging cyclical stocks, such as travel, leisure, banks, and energy companies. Several companies in those groups rose +15% or more in Monday’s trade. The smallcap Russell 2000 index (IWM), highly populated with cyclical companies, jumped almost +4% for the day, while the Nasdaq 100 (QQQ) closed the day DOWN -1.5%, reflecting the tremendous shift in market favorites for the day. A much more modest version of the same trade occurred Tuesday. The DJIA added another +0.9% while the Nasdaq slipped -1.4%. Wednesday brought a reversal of the trade, however, with the Nasdaq rebounding +2% while the DJIA held flat. The FANGMA stocks, leaders throughout this year, found buyers for the day as the vaccine-related euphoria ebbed. Market indexes slid back -1% Thursday as rising coronavirus cases and slimmer hopes for a Congressional stimulus package dimmed investor enthusiasm. The bulls returned Friday, leading stocks higher by +1.4% in a broad move upward. As an example of the dramatic shift in fortunes this week, work-from-home favorite, Zoom (ZM) stumbled -19% while beleaguered cruise line Royal Caribbean (RCL) surged +20%.
A second consecutive strong week from cyclical stocks lifted the S&P 500 (SPY) to a +2.27% gain and a record weekly close. The selloff in FANGMA and other tech stocks pushed the Nasdaq 100 (QQQ) down -1.25%. Smallcaps (IWM) blasted to a record close with a +6.04% gain on the week.