Will the latter be first?
A fortnight ago, on Monday 9 November, Pfizer reported an effective vaccine against the coronavirus. Although this news had been in the air for some time, the prices on the stock exchange exploded. All stock exchanges worldwide reacted. A week later Moderna came up with a perhaps even more effective vaccine. And this week AstraZeneca announced that it will soon have a vaccine that works well. Nevertheless, after two weeks, remarkable differences can be observed.
The comeback of the losers
For example, the Russell 2000 index, which has so far lagged behind considerably, mainly small value shares, has been at 10.6% profit since 9 November. On the other hand, the big winner of 2020, the Nasdaq, a lot of technology, stands at a small loss. The Eurostoxx50, a lot of value shares and also a big loser this year, stands 9.2% higher. The differences between the various sectors are becoming more striking. For example, large corona losers such as financials and energy have been in the plus 12 and 27 percent respectively since 11/09, while the technology sector shows a loss of 0.8 percent. The expectation that we will have the virus under control in the short term creates winners and losers on the stock market. The opposite of what we have seen so far this year.
Winners and losers
For example, the prices of big corona winners such as Amazon, Alibaba, Zoom, and Netflix are clearly lagging behind the big losers of 2020, the shares of the old economy. The tourism and transport sectors, in particular, are doing exceptionally well. Is this the long-awaited turn from what many believe to be significantly overvalued growth stocks to the badly undervalued ones? Is this a case of the latter to be the first?
The Big Five have gotten very big
Investors in value stocks, mainly banks, insurance companies, energy funds and industrial stocks, have for more than a decade been watching with distress as they have been constantly losing out to investors in so-called growth stocks, mainly from the technology sector. Thus, after years of rising share prices, the five largest shares — the well-known Big Five — are all technology funds. Apple, Microsoft, Amazon, Alphabet and Facebook together have a market capitalisation of over USD 7 000 billion. For the record, that is more than the combined stock market size of all banks and energy funds worldwide!
Swing of the Pendulum
As soon as valuations take on such extreme forms, a turn in the market is almost inevitable. The British have a fine term for this, the swing of the pendulum. And with the advent of the vaccines, this loser rally is not so strange either. After a year in which industry has had to tighten its belts and consumers have saved a great deal because there was not much to spend, a spectacular economic recovery does not seem impossible. When the vaccines lead to a normalisation of the economy, demand could pick up considerably. Value shares are expected to benefit more than growth shares.
Bonds do not participate
At least, that is how it is argued. The bond market, for example, is not yet doing so, even though equities are anticipating a recovery. The interest rate on 10-year government bonds may have risen slightly, but it should not be called that much. The inflation expectations in the market indicate only a slight increase from 1.4% at the deepest point of the pandemic to barely 2% now. In other words, there does not yet seem to be a major recovery accompanied by a sharp rise in inflation. If this continues, the Federal Reserve will be able to keep its foot on the accelerator for a while and will not yet have to raise interest rates. The forthcoming Finance Minister — Janet Yellen — also remarked that interest rates could remain on the low side for a while.
Effective vaccines, economic recovery in 2021, a stimulating central bank, long-term low-interest rates, the stock market seems to be entering a sweet spot. However, investors may be a little too ahead of the game at the moment. It would be better if they did not say goodbye to technology. The digitisation accelerated during the crisis will never disappear, at most lose some speed. And when interest rates remain low for a long time to come, growth shares from the technology sector are still interesting.