It’s possible that a sustained rotation into value stocks from growth has begun. The economy is recovering quickly and value stocks, which have far underperformed growth this year, are more economically-sensitive than growth is.
The S&P 500 fell 0.81% Friday, dragged lower by the mega-cap tech components of the Nasdaq 100, which fell 1.27%. As strong economic data has rolled in, the 10-Year Treasury yield rose to 0.72% from 0.63%. Tech shares were down 5% at one point earlier in the day.
Tech stocks into Thursday were trading at incredibly overstretched valuations, especially compared to the still-solid earnings growth analysts are projecting for the next several years. Between, Thursday and Friday, the Nasdaq 100 fell about 6%, more tan halfway to a correction in percentage point terms. In that time, the Vanguard S&P 500 Value ETF (VOOV) - Get Vanguard S&P 500 Value ETF Report fell just 1.2% and it fell just 0.09% Friday.
Thursday, jobless claims were under 900,000 for the past week against estimates of 940,000. Friday, the the Bureau of Labor Statistics said the unemployment rate has fallen to 8.4% (1.4 million jobs were added in August against estimates of 1.2 million) from above 15% just months ago. These data points, showing an unprecedented speed of recovery from a recession that took hold just as fast, confirm the economy is maintain its recent rate of recovery. That was likely one factor scaring investors out of growth tech, which has powered through the economic headwinds, experienced accelerated earnings growth from the at-home environment and outperformed value by a wider margin than in 2000, just before the tech bubble busted. Investors are afraid — and analysts warn — that the accelerated demand for services like cloud, streaming and e-commerce is being massively pulled forward from later years in 10-year-plus valuations.
This, according to Stifel’s Head of Institutional Equity Strategy Barry Bannister, is reminiscent of just how growth stocks behaved before and after the tech bubble bursted. Bannister said that earnings multiple compression in those tech stocks after 1999 outweighed the premium annual earnings growth against the S&P 500 so much that the Nasdaq 100 underperformed the broader market between 1999 and 2009. The Nasdaq 100 fell at an annualized rate of 6.4% in that span, while the S&P 500 fell just 0.9% on an annualized basis.
Meanwhile, the economic recovery has seen the highly cyclical airlines rise in the past two days. United Airlines (UAL) - Get United Airlines Holdings, Inc. Report is up 6% in the past two days. Bank stocks have risen as the yield curve has aggressively expanded, a positive for bank profitability. Bank of America (BAC) - Get Bank of America Corp Report is up `1.9% in that span and rose more than 3% Friday.
Here’s what Wall Street is saying:
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"After reaching record highs on Wednesday, major equity indexes fell as investors rotated out of the tech sector. Tech, particularly in the US, has been a clear beneficiary of stay-at-home trends during the COVID-19 pandemic. News that the CDC has asked US state officials to prepare for the possibility of limited vaccine distributions to high-risk groups as soon as 1 November added to optimism on an earlier vaccine delivery. But this earlier availability could drive a faster economic recovery, which could then prompt a rotation away from tech into more cyclically exposed sectors, such as value.
Barry Bannister, Head, Institutional Equity Strategy, Stifel:
"The current market level is pivotal: the cyclically adjusted price-to-earnings multiple (CAPE) of the S&P 500 is knocking at the doorstep of the same point at which CAPE broke out in the last two years of the most powerful bull markets of the past century, the late 1920s and late 1990s. If CAPE does break out, the building (and inevitable bursting) of a bubble could make the market a “greater fool game” challenge in the near-term and a modest return vehicle longer term, dashing the optimism of investors. For both the 1972 Nifty Fifty and 1999 NASDAQ 100, P/E compression offset strong EPS the next decade.”
Mike Loewengart, Head, Investment Strategy, E*Trade:
"It’s been a while since we’ve been in the throes of the type of volatility that defined the market earlier this year, so investors may have some post-traumatic stress after yesterday’s landslide. For some perspective, September ushers in a historically volatile period for the market, and has a particularly bearish reputation. Certainly, wide price swings are never comfortable, but investors should keep in mind that periods of volatility like this are not uncommon, especially on the heels of an epic rally, and should be taken in stride. More often than not, this type of sharp down day has turned out to be part of a shorter-term pullback than a longer-term down move. On the bright side, we’ve seen some pretty solid economic data this week, and a strong jobs read this morning—pointing to signs of a recovery that continues in the face of an unending pandemic and uncertainty about future government aid.”
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance:
"Another good report as close to 1.4mm new jobs were created last month and the unemployment rate is now at 8.4%, which is the first time that we dropped below double-digits since the lockdowns took full effect. The market should view these numbers as positive and while we may continue to see a correction in the technology and technology-related stocks, there are still plenty of opportunities in companies that were more adversely impacted by the pandemic and are continuing to improve. Look for the bull market to continue amidst some sector rotation as people take profits in technology names and put more money to work in more cyclical parts of the market such as in the Energy, Materials and Financials sectors.”