This will be a week remembered for the largest one-day momentum crash and the biggest single-session value squeeze in history.
Of course, those market events were catalyzed by a medical breakthrough which, all cynicism aside, may go down as a watershed moment in the fight against the pandemic.
When we think about the “legacy” of a given week, we (as market participants) naturally define things in terms of price action as opposed to the catalyst itself. It’s important to remember that in almost all cases, the catalyst is what matters for the rest of humanity.
The durability of the rotation set in motion by the Pfizer vaccine news is one of the key unknowns for traders and investors. Thursday was notable for the extent to which it suggested market participants care about what happens right now more than they do about what’s likely to happen later, a paradox of sorts given that equities are supposed to “pull forward” future outcomes.
While brighter days are almost certainly coming in 2021, for now, some of America’s largest cities are headed back into various versions of virus lockdowns. The specter of more stringent measures further undermines the vulnerable services sector at a delicate juncture.
So, where to from here? It’s a question I’ve explored all week and will continue to document given the answer will help define the trade in 2021 across both equities and rates.
“We acknowledge that anticipating the (contrarian) catalysts, and by extension, days of large rotation, is by its very nature difficult,” JPMorgan’s Dubravko Lakos-Bujas wrote, in a note discussing the sheer magnitude of what happened on Monday.
He discussed, in straightforward terms, why these rotations can be so violent. “Momentum stocks typically make gains in small incremental steps with confirmatory news flow and have big losses on days when unexpected contrarian information is revealed,” Lakos-Bujas went on to write, before summing the situation up. “Momentum factor returns have a fat left tail [while] Value is the opposite with a fat right tail,” he said.
With the customary caveat about “the best-laid plans,” 2021 has all the ingredients you’d need for a durable rotation. (How many times have you heard that before?)
BofA’s Michael Hartnett wrote late Thursday that the reopening trade will be “HY>IG, EM>SPX, small>large, and value>growth.” Investors, he remarked, are almost sure to barbell their exposure to cyclicals using “conservative large cap tech plays until [a] vaccine arrives and with it, unambiguous signs of corporate animal spirits.”
Goldman recommends just that. “We recommend investors employ a barbell strategy that combines tactical positions in deep Value stocks with long-term positions in secular Growth stocks, which are typically firms with high growth investment ratios,” the bank’s David Kostin said, in his year-ahead outlook released earlier this week.
For JPMorgan’s Lakos-Bujas, “a positive growth backdrop, closing output gap and COVID normalization all suggest that the Value trade has legs.”
Underscoring the simple message from the visual (above), he also wrote that “rising bond yields and firming inflation remain a key risk to Momentum stocks” and warned that Monday was “a perfect warning indicator for what may come in 2021.”
In a separate note, JPMorgan boosted their exposure to stocks. “We expect equities to continue to rally, and bonds to sell off,” the bank’s asset allocation team wrote, adding that they’re sticking with a “pro-risk allocation in our model portfolio given the easing of major market risks, still moderate investor positioning, strong growth rebound, and robust policy support.”
The vaccine, the bank says, is a “game changer.”
Nobody knows anything. One suspects that strange things, inexplicable things, difficult to forecast or understand things are likely to happen between now and the end of the year challenging the Q4 seasonal ramp up expectation or Dec slide in the dollar seasonal.
There could be. Something that produces an impact like the rout in December 2018.
Seems like this setup is different. If there is an accident in Q4 yet, it may be sharp, furious, and steep. And then get bought like there is no tomorrow. The probabilities feel more favorable than either ambiguous or negative.
Of course nobody knows anything is so true.
So, start positioning accordingly.
Not seeing the 2021 rainbows (in the US) with C-19. The pandemic gets worse here by the day; it is a complete failure of governance at the federal level (and certainly in many states with troglodytic “leaders”). Pfizer’s CEO sold $5.6m in stock the day of the positive news announcement; hopefully prison beckons. I’ll believe it when I see everyone going about their quotidian lives in fall 2021. Not. Going. To. Happen. Autumn is still arrestingly beautiful however.
the sale was triggered by price if that makes a difference.
It doesn’t, he sold 64% of his position created 3 months earlier. Good for him, but CEOs don’t dump shares when they’re about to mint a fortune with a new vaccine. I’m skeptical. Spectacularly bad optics, lacks personal integrity, but maybe that’s passé.
With fiscal stimulus unlikely, what happens to consumer spending in Q4 and Q1 of next year? What will make up for that shortfall?
This is what I have a hard time wrapping my head around. How would it even be possible for people to spend nearly as much as they usually do during the holidays? How many impulse items will go unbought because people aren’t going out holiday shopping or don’t have a job? How much less spending on holiday travel this year and all the ancillary spending associated with that? I suppose people can just as easily impulse buy at Amazon, but I seriously doubt we’ll see the usual holiday hiring deluge that we usually get this time of year which will further dent incomes. It would seem the knock on effects of all this will be hugely damaging to all but a handful of retailers who were barely hanging on before the pandemic. I suppose none of that matters to Mr. Market at this juncture, but it will be hard to stomach the human toll of these dynamics. Outside of ramping up my charitable donations and spending at local businesses, I have no idea what to do about it.
Computers move quickly………………………. Whether they are all knowing is another question.
Does a vaccine correct the structural growth challenges? How about a Biden presidency (productive investments)?
For “value” to outperform, growth is needed. Not a just a return to prior slow growth but a sustained uptick led by productivity enhancing investment. And what about those pesky debt laden bal sheets?
And of course the int rate battle……………….. IF you believe the 10yr should be “around” nominal GDP that could very well provide a headwind on multiples.
Interesting times, that is why we love doing this.
That. COVID-19 was a tailwind for many tech companies, that’s true… BUT the best we can hope for is a return to the slow growth environment we’ve known for the past 20 years (30 years here in Europe ; probably nearing 40 in Japan?)
This isn’t conducive to Value outperforming Growth for long…
Is the pic of Natalie Portman in Leon? Doesn’t quite look like her…