Today’s news that AstraZeneca and Oxford University’s Covid-19 vaccine is “highly effective” now marks the third Monday in a row that we’ve received positive news on a vaccine. Pfizer first reported positive data on its vaccine on Monday, November 9th, and Moderna a week later on Monday, November 16th. So much for having a case of the Mondays. While the winter will still prove difficult (and deadly), we can now realistically expect a return to normalcy by spring or early summer next year.
Not surprisingly, the stock market has greeted this news with big gains in the major indices (the Dow was up more than 3% after the first trial results were reported). However, drill down further, and you will see that not all stocks are reacting positively to the news, with some sectors down significantly. Who are the big winners and losers, and more importantly, will they stay that way?
Value vs. Growth
Value stocks are companies that tend to be more susceptible to changes in the economy, such as banks and energy firms. This contrasts with growth stocks (technology, medical device firms, etc.) which are companies thought to be able to grow earnings in any economic climate. One constant over the last ten years is that value stocks have lagged behind growth stocks.
This year had been no different, with value stocks down 2% and growth stocks up more than 30%.
However, positive news on the vaccines has now flipped this relationship on its head. The chart below shows the performance of value versus growth stocks on the three days when positive vaccine news was released (including today). Value stocks were up a combined 6.8% over the three days, while growth stocks were down 1.3%. Why?
The vaccine portends a return to normalcy and higher economic growth ahead. What’s good for the economy, tends to be good for value stocks. But will this trend continue?
The chart below shows the performance of value and growth stocks in the days following the vaccine news (Tuesday through Friday, each of the last two weeks). Notice that value and growth stocks have performed almost exactly the same. In other words, while value stocks greatly outperform on the days the news is released, that outperformance quickly dissipates.
This suggests that the performance of value stocks in the wake of the vaccine news amounts to nothing more than a “head fake”, rather than a long term trend.
The U.S. economy faces a difficult next 6 months, and economic growth will likely remain depressed for some time, even as a vaccine emerges. As of right now, the U.S. economy is in desperate need of additional federal stimulus.
With interest rates near-zero (and likely staying there) and travel perhaps permanently impaired (causing oil prices to remain low), we believe there are better places to invest than banks and energy firms. For this reason, we continue to underweight value stocks in your portfolio.