“Why comment on the past?,” SocGen’s Andrew Lapthorne and Solomon Tadesse wondered, in a note documenting the dramatic factor rotations that played out on Monday following what appeared to be extraordinarily good news from Pfizer on the vaccine front.
That’s a question that often confronts analysts in the days after spectacular market fireworks.
It’s easy enough for journalists to document events in real time, but penning research is a bit more tedious, which in many cases relegates the sellside to a role producing postmortems which aren’t always particularly useful.
But in this case, it’s worth looking back at Monday (and to a lesser extent Tuesday) because the price action offered a preview of what’s coming in the event the pro-cyclical rotation some market participants have spent the last five years (or more) waiting on, finally does materialize.
“Apart from providing some ‘wow’ datapoints, there may be more to come,” Lapthorne wrote, of the utility in spending additional time discussing the Monday/Tuesday factor reversals.
I’ll highlight a pair of those “wow” datapoints first.
Monday witnessed what SocGen described as an “off the scale” drawdown for a 12-month price momentum factor. The move, Lapthorne observed, was “more than double the previous worst day.”
The bottom pane is self-explanatory. It was the largest ever daily move in Value versus Quality.
Those are multi-standard deviation events. In fact, there’s a sense in which they aren’t theoretically “possible,” which perhaps speaks to the futility of using the bell curve in modern markets.
In any case, the point isn’t to delve too deeply. Rather, the crucial bit from SocGen’s note is that even after Monday/Tuesday, we are nowhere near “correcting” for years of outperformance from growth, momentum, and bond proxies at the expense of cyclical value.
That outperformance (or, more precisely, the cumulative effect of that outperformance as it’s manifested in, for example, relative valuations) is by almost all accounts one of the biggest bubbles in modern history.
Lapthorne doesn’t employ quite that level of hyperbole, but he does drive home the point. “The valuation gap between perceived winners and losers remains historically wide,” he said.
The big question is simply this: What happens if the tried-and-true strategy of being long equities expressions that are in one way or another tethered to the vaunted “duration infatuation” in rates finally reverses? The figure (below) suggests the answer is “nothing good.”
“There is still a lot of uncertainty around and COVID-19 remains center stage,” SocGen’s strategists went on to say.
Then, they cautioned that “the latest price moves demonstrated to many investors that in an equity market pumped up by monetary policy, for expensive Momentum and Growth stocks, good news can actually lose you money.”