By Pete Biebel, Senior Vice PresidentPrint This Post
Last week began with news that one of the COVID vaccines in development had proven to be surprisingly effective in trials. We all knew that an effective vaccine would eventually be created; what surprised the market was the trial vaccine’s claimed 90% efficacy rate. Stock index futures rocketed higher in pre-opening trading. All the major indices hit new all-time highs on Monday’s opening. Even the Russell 2000 Index of small cap stocks (RUT) finally exceeded its August 2018 high. The Dow Jones Industrial Average (DJIA) briefly showed a 5.5% gain, up more than 1600 points. The S&P 500 Index (SPX) was up nearly 4% at its best. RUT led them all with a gain of more than 6% in the opening half-hour. The NASDAQ Composite Index (COMP), at its best, was up less than 2% that morning.
It turned out to be the fourth time in the past five weeks that the major indices saw their highs of the week in the early hours of trading on Monday. The initial celebration of the news was impressive, but the euphoria quickly faded. For the week, DJIA gained an impressive 4%; SPX was up by a bit more than half as much. RUT rocketed nearly 6% on the week. COMP, which throughout 2020 has typically been the leader when the market has registered big weekly gains, actually lost about 0.5% last week. A Wall Street Journal article pointed out that it was the widest weekly margin of outperformance by DJIA over COMP since 2002.
That outperformance by DJIA, or more accurately the underperformance of COMP, was a symptom of the market’s reaction to the vaccine news. While the potential availability of a highly effective vaccine was a shot in the arm for the overall market, it triggered a Jekyll and Hyde-like reaction, resulting in personality inversions at opposites ends of the sector performance spectrum. Stocks that were the shelter-at-home winners tumbled. The back-to-normal stocks, including airlines and cruise companies that had languished for months sailed higher. Financials and even energy and real estate stocks also had an unusually strong week.
There was a similar inversion in the relative performance of growth stocks vis-à-vis value stocks. Stocks of companies that have seen and are expected to continue to see rapid increases in their annual revenue are characterized as “growth” stocks. Virtually all of the best performing stocks year-to-date have been growth stocks even though many of them are not yet profitable companies. Stocks at the other end of the spectrum are labeled as “value” stocks. They typically are profitable companies but ones with revenues and earnings growing at a more subdued pace. Fundamental valuation metrics for value stocks tend to oscillate in predictable ranges, and also tend to be at the cheap end of the ranges. Similar statistics for growth stocks are often off-the-charts expensive.
Growth has been handily outperforming value in recent years. For the first ten months of his year, growth has shellacked value. Prudent investing clients with diversified portfolios may have been questioning the wisdom of their diversification through much of this year. A narrow pocket of high-growth, mega-cap tech stocks rocketed higher, while stocks that seemed to be good values languished. That trend may have reversed last week.
One index that tracks the growth stocks in the S&P 500 was up nearly 26% for the year through the previous Friday. Last week it was virtually unchanged. Conversely, a similar index for the S&P value stocks, which was showing a year-to-date loss of about 11% through the previous Friday, gained about 5.5% last week. And, even though small-cap stocks were much stronger than large-caps last week, a parallel phenomenon played out in small-caps. An index that tracks the RUT growth stocks was up 13.4% through the previous Friday. Last week it gained another 3.4%. Not bad. But, the RUT value stock index, which was down more than 15% for the year through the previous Friday, gained more than 9% last week.
Some of the value stocks that saw the largest gains last week are in the previously forlorn Energy and Financials sectors. The S&P Energy Sector Index racked up a very impressive 17+% gain last week. Unfortunately, that merely reduced the sector’s year-to-date loss to something around 44%. The second-best performing group last week was the closely related MLP stocks. The MLPs have been trending lower for the past six years. Many have attractive distribution yields, but that’s been small consolation as their prices have steadily eroded. The group plummeted another 70% from the already depressed level at which it began the year into its March low. Last week’s near 13% gain reduced the group’s year-to-date loss to 44.5%.
The Financials sector peaked with the overall market in February of this year. It lost about 40% into its March low. It recovered about half of that loss over the next few months but has just churned sideways since then. The flat yield curve has certainly contributed to the group’s lackluster performance, but the accelerated adoption of online banking brought on by the COVID contagion may be hurting the values of the traditional banks. Last week the sector gained a little more than 6%, cutting its year-to-date loss to a little over 13%. Some of that gain may have been fueled by the belief that a Biden win would likely lead to higher long-term interest rates and a steeper yield curve.
Monday’s vaccine news triggered a sell-off in Treasuries. The effective yield on Ten-Year Treasury Notes spiked up from near 0.81% to near 0.96%, their highest yield since March. Yet, even as Treasuries were being sold, high-yield “junk” bonds were rallying. With prices for long Treasuries near their lows of the year, prices for junk bonds, as a group, are near their highs of the year. This phenomenon may be a sign that the market is overly optimistic about future financial and economic conditions.
Money market fund balances indicate that there’s still a lot of cash on the sidelines. How much of that money flows into chase the post-pandemic stocks higher or flows into buying the dip in the in the big tech leaders may hinge on the trajectory of the new COVID cases. The market won’t be able to ignore the numbers if the rate of increase doesn’t level off soon.
The only nearby technical area of concern is near last week’s lows. SPX found support in the 3510 – 3520 range twice last week. Any break below that level could spark at least a short-term rush for the exits.
There’s not much on this week’s economic report calendar that is likely to upset the markets. The Retail Sales data on Tuesday could spur a reaction, but the numbers would have to be significantly stronger or weaker than expected. The Unemployment Claims data on Thursday will typically inspire at least a brief reaction. The earnings reports calendar will be getting a little shorter each week. This week’s list includes many large brick-and-mortar retailing companies.
|Monday 11/16/2020||Empire State Manufacturing Index||10.5||13.5|
|Retail Sales, October, M/M||+1.9%||+0.4%|
|Retail Sales, ex Vehicles & Gas, October, M/M||+1.5%||+0.5%|
|Import & Export Prices, Imports, October, M/M||+0.3%||+0.2%|
|Import & Export Prices, Exports, October, M/M||+0.6%||+0.3%|
|Industrial Production, October, M/M||-0.6%||+0.9%|
|Business Inventories, September, M/M||+0.3%||+0.5%|
|Housing Market Index||85||85|
|Housing Starts, October, SAAR||1.415mm||1.460mm|
|Initial Jobless Claims.||709K||710K|
|Philadelphia Fed Manufacturing Index, November||32.3||24.5|
|Existing Home Sales, October, SAAR||6.540mm||6.470mm|
|Leading Indicators, October, M/M||+0.7%||+0.7%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.