A ‘Rogue Wave’ of Vaccine-Related Optimism Up-Ends Prior Winners and Creates New Ones
When Pfizer, in conjunction with BioNTech, announced more than 90% effective vaccine results on Nov. 9, the entire investing world got reordered. Suddenly, there was a wholly different reconfiguration of what the world could look like in a years’ time.
It doesn’t happen often, but the market does this every once in a while. An unanticipated event, or an unexpected piece of news, can force-feed a whole new scenario that needs to be “priced in” through value adjustments. The more divergent the scenario shift, the more disruptive the adjustments can be.
We know the vaccine-powered sentiment shift is real, and not just equity investors playing the hope game, because bond markets and commodity markets were dramatically impacted alongside global equity markets.
Crude oil prices rocketed higher on Nov. 9, and U.S. Treasury prices fell, causing long-term interest rates to rise notably. Equity investors alone cannot move markets in that manner.
For some areas of the market, this injection of vaccine hope was akin to Lazarus rising from the dead. Along with the obvious example of cruise ships and airlines — more people will take trips if COVID-19 is defeated by a vaccine — various real estate stocks like Host Hotels and Resorts (HST), Simon Property Group (SPG), and SL Green Realty (SLG) rose 30% to 40%.
“Real estate was a COVID loser. Many of the business models were an assembly of people,” said Michael Knott of Green Street Research. “And now with the potential vaccine, it’s like Doc Brown figured out how to get his time machine to work.”
Edward Acton, a strategist at Citigroup, wrote to clients that the positive-news shock of a 90% effective vaccine “catalyzed a rogue wave of rotational optimism across global bond curves and risk-assets alike.”
In nautical terminology, a rogue wave — also known as an “extreme storm wave” — can be twice the size of other storm waves and appear to come out of nowhere, catching a ship’s crew completely off guard.
So it makes sense that Acton would compare Monday’s vaccine-fueled price action, which swamped markets globally, to a rogue wave, though this development was a positive one for humanity.
But it certainly wasn’t a positive development for “work from home” stocks and other pandemic plays, many of which have taken extreme hits this week.
When a rogue wave powers up, it draws a great amount of liquidity unto itself, concentrating the liquidity in a specific area. In a risk-off event, you might see a great wash of liquidity go into, say, U.S. treasury bonds or precious metals.
In this particular event, which was “risk-on” for specific areas of the market, we saw a concentration of rogue-wave liquidity go into the beaten-down assets and industries that would benefit from a quicker end to the pandemic.
But the thing about a wave like this is that liquidity has to be drawn from other places, because there is only so much to go around at a given time. Adjacent to the rogue wave, you can have giant empty spaces, or surface-level depressions, where liquidity used to be.
And so it was with pandemic-powered momentum stocks, which, as a group, took their biggest hit on record this week, and possibly the biggest hit ever, as liquidity was sucked away from momentum names.
Bloomberg tracks something it calls the U.S. Portfolio Momentum Total Return Index, which basically measures the performance of momentum-oriented stocks in comparison to value stocks.
“After Pfizer Inc. revealed its COVID-19 vaccine,” reported Bloomberg, “the momentum factor — which buys the past year’s winners and dumps its losers — plunged 3.4% in early New York trading” to register “the biggest intraday drop since records began in 2000.”
Two of the highest-profile names to get hammered this week were Zoom Video Communications, Inc. (ZM) and Beyond Meat (BYND).
On Nov. 6, a Friday, ZM closed above $500 per share. On Nov. 10, a Tuesday, ZM closed just above $376 per share, for a loss of nearly 25% over the course of two trading days.
It remains true that video communications are the future and that Zoom-style video conferencing is here to stay. The problem was the insanity of Zoom’s valuation, which had reached an incredible forward multiple of 55 times price-to-sales. At that level, Zoom might as well have been priced for infinite growth.
Beyond Meat (BYND) has had a similar comeuppance, with the shares losing 35% in roughly a month. As with Zoom, the future for plant-based meat substitutes is bright — but not nearly as bright as the nutty valuations implied.
We can also see the impact of a vaccine-inspired grand rotation in the dramatic performance gap between small-cap stocks and large-cap tech stocks. Following the vaccine news, the small-cap Russell 2000 index rocketed to new highs, while the tech-heavy Nasdaq Composite — which is still below its Sept. 2 high as of this writing — went into retreat.
In the TradeSmith Decoder portfolio, we have noted that, while precious metals and precious metals equities were hurt by this vaccine-themed rotation — in part due to long-term interest rates rising on the prospect of economic growth — Bitcoin and Bitcoin-related equities have not been hurt at all.
We also see a major trading opportunity in forex, as the result of an overly strong currency (not the dollar) set to weaken substantially in 2021, with a new wave of vaccine-fueled global optimism kicking off an uptrend that could last for months.
And last but not least, the sharp upward move in fossil fuel energy prices, with the potential for global travel to bounce back faster than anticipated, has sparked our strong interest in energy-related names.