Is a lasting rotation in stocks about to take hold? That is the question that investors are dealing with after a small-capitalization and battered cyclicals outperformed large-cap, technology-related companies on Monday, amid evidence of progress toward a coronavirus vaccine.
A number of analysts are now betting that the trend continues, including Thomas Lee’s Fundstrat, after the Russell 2000 index /zigman2/quotes/210598147/delayed RUT -1.49% of small-cap stocks outperformed the large-cap Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.87% by its widest margin on record Monday, at 5.23 percentage points, dating back to 1986, according to Dow Jones Market Data.
On top of that, the Russell 2000 Value Index /zigman2/quotes/210598132/delayed XX:RUJ -1.48% surged 6.85% on Monday, compared with a modest 0.9% gain for its Russell 2000 Growth Index /zigman2/quotes/210598133/delayed XX:RUO -1.51% counterpart, representing the largest outperformance of small-cap value stocks over small-cap growth stocks for a single day in available data back to 2000.
The catalyst for the trades was attributed to vaccine news from a partnership between Pfizer /zigman2/quotes/202877789/composite PFE -0.14% and BioNTech /zigman2/quotes/214419716/composite BNTX -4.02% that indicates that a coronavirus vaccine has a 90% efficacy and could start to be administered by the end of 2020 .
Also, the emergency approval of Eli Lilly & Co.’s /zigman2/quotes/200106384/composite LLY +2.19% COVID-19 antibody treatment late Monday fortified the view that a treatment or a vaccine may be in the offing to combat the deadly illness that has hobbled the global economy and that has now sparked a fresh appetite for assets viewed as undervalued by some metric.
Fundstrat’s Lee says that he expects that genuine rotation into value areas and coronavirus-stricken sectors to surge once a vaccine is viewed as viable.
Lee said that “once investors are convinced a roadmap exists for a non-pandemic world, we expected a violent rotation into epicenter stocks,” in a research report published on Tuesday, referencing the runup in stocks to record levels.
Stocks that would benefit from economic recovery rose Tuesday. Chevron /zigman2/quotes/205871374/composite CVX -3.56% and Exxon Mobil /zigman2/quotes/204455864/composite XOM -4.81% were both up 1%. Boeing /zigman2/quotes/208579720/composite BA -2.66% traded 7.4% higher. But stocks that were seen as both growth stocks and defenseive plays during the pandemic suffered. Amazon /zigman2/quotes/210331248/composite AMZN -0.74% shares were down 2.6% after falling 5% on Monday. Zoom Video /zigman2/quotes/211319643/composite ZM +0.34% dropped 7.5%, adding to its 17% decline from Monday.
Lee said that Monday’s moves represent “baby steps” (see chart below) in the direction of a sustained rotation and highlighted that there have been a a number of head fakes in recent months that could serve as cause for caution by investors.
“There have been many fits and starts for this epicenter rally, so there was naturally mixed reception, by our clients, for this rally today. Foremost, I want to emphasize that the future is uncertain, and COVID-19 is even more unpredictable,” Fundstrat wrote in its report. “Thus, the timing for any sustained move in epicenter stocks, aka cyclicals, is highly uncertain,” the analyst wrote.
That said, the gains may make a rise for value in 2021 more likely, Fundstrat said.
Fundstrat’s technical strategist Robert Slumber says that investors should expect pullbacks in the market after the recent uptrend for markets but should use those retrenchments as opportunities to buy the dips in the market.
“However, we continue to expect pullbacks to be shallow and short-lived and recommend investors continue to build exposure to equities, notably cyclicals,” Slumer said. “A simple doubling of the September-November trading range suggests further upside into year-end and Q1 toward S&P 4000,” he said.
On Tuesday, rotations seemingly continued apace with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.57% up 0.8%, while the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -0.87% was of 1.3% and the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.72% was slightly lower, down 0.1%.