November 10


Rational Exuberance

By David Nelson, CFA CMT

Even before Pfizer’s (PFE) historic announcement that their Covid vaccine trial was showing 90% efficacy the S&P 500 was on track to breakout above important resistance. Stocks have been held hostage trapped in a 350 S&P point trading range defined by the all-time September 2nd high and where 2020 started. In a near manic depressive state investors have been caught in a tug of war with rising Covid cases, increased shutdowns, political unrest on one side and falling unemployment, better economic data, and strong earnings on the other.

The Pfizer (PFE) news trashes the current investor playbook of hiding in stay at home beneficiaries. The epicenter stocks exploded higher including Airlines, Cruise stocks and even REITS like SL Green (SLG) +37% on the day. Energy stocks were up between +10 & +30% with the broad sector (XLE) +14%.

Of course the capital to buy these names had to come from somewhere and the obvious source of funds was the stay at home trade including Netflix (NFLX), Docusign (DOCU), Zoom (ZM) and Peloton (PTON).

Rational or Irrational?

The knee jerk reaction of course is to assume today’s rotation was overdone and in the short run could easily be true. However, consider the following. Coming into the week the spread between Nasdaq 100 (QQQ) and the Equal weighted S&P 500 (RSP) was close to 40%. Most of the heavy lifting has come from a handful of mega cap growth stocks many of which actually benefitted from the Shutdown.

Monday’s close of the Nasdaq should give Growth Bulls pause. QQQ put in an outside day to the downside on higher than normal volume.

Reversion to the mean is a powerful force and if the Covid Vaccine continues to show promise or if as some say others vaccines follow the irrational quickly becomes rational in that context.

Growth performs best when there isn’t any. It makes perfect sense for investors to move down the valuation curve into obvious beneficiaries of a vaccine including transportation, industrials and close proximity businesses like restaurants. If economic activity continues to improve banks will be the beneficiary of a steepening yield curve. No the growth trade isn’t dead but you may have to make some room for those previously left behind.

Don’t make the mistake that a vaccine will save all

Covid accelerated a lot of trends already in place. The move to online had been well established and retailers like Target (TGT), Walmart (WMT) and others that went to great lengths to revamp their business models will succeed long term. Those that didn’t will get dead cat bounces that may last for a while but ultimately will succumb to economic trends once the euphoria subsides.

*At the time of this article some funds managed by David were long WMT, RSP & XLE