Investors Are Rotating

By Nicholas Jasinski | Tuesday, November 10

Value Gains. "Rotation" was the name of the game today. After yesterday's strong and relatively broad rally, investors spent today's session shifting out of technology and growth stocks and into more economically sensitive areas of the market. Vaccine-driven optimism about the unfolding economic recovery remained high.

Once a critical mass of the world's citizens has been innoculated, service-based businesses that rely on human interaction can fully participate in the rebound. It will also mean that workers from barbers, to physical therapists, to pilots will be able to return to the workforce. That's an unquestionable positive for the economy, corporate profits, and stock valuations. And, as always, the market will move ahead of the reality.

The vaccine optimism has also lifted bond yields in recent sessions, which adds fuel to the growth-to-value rotation. The yield on the 10-year U.S. Treasury note ticked up to 0.97% today,  its highest level since March. Bond yields rise when prices fall.

All else being equal, higher bond yields favor value stocks over growth. Valuations of growth companies that are expected to earn the bulk of their profits far down the road rise when discount rates are low—and vice versa.

The Dow Jones Industrial Average closed up 0.9% today, while the S&P 500 slipped 0.1%. The tech-heavy Nasdaq Composite dropped 1.4%.

Under the surface, the S&P 500 industrial sector gained 1.8%, while energy stocks surged 3.1%. Both are economically sensitive vaccine beneficiaries. The technology sector, meanwhile, lost 1.9%. It includes many of 2020's biggest winners, and even some companies that may lose business (or at least grow slower) once the pandemic has been defeated.

The other major group that has gotten a vaccine-driven boost this week has been small caps, whose performance tends to be more tied to the domestic economy. The Russell 2000 has outperformed the Nasdaq by 8.5 percentage points over the last two days. It's the largest two-day performance spread on record.

DJIA: +0.90% to 29,420.92
S&P 500: -0.14% to 3,545.53
Nasdaq: -1.37% to 11,553.86

The Hot Stock: D.R. Horton +9.1%
The Biggest Loser: Carnival -13.1%

Best Sector: Energy +3.2%
Worst Sector: Technology -1.9%