Many are asking is this rotation from growth to value real? The rotation commenced on Monday November 9 with Pfizer’s COVID vaccine announcement. In two days, according to Goldman Sachs five stocks (FAAMG) fell from representing about 27% of the S & P 500 value to 22%. Yesterday the same five stocks represented about 23% of the index’s value.

As noted last week and as per Goldman, historically the five largest companies represent about 12% of the S & P’s value. The previous peak was 18% in 2000, tantamount to the levels achieved in the late 1970s as per the Bank.

This rotation has greatly impacted many quantitative firms, firms that slice and dices statistical abnormalities on a historical basis. Are more traditional money managers next?

As noted several times, if the five largest companies fall in value in aggregate of 10%, the smallest 100 members of the S & P 500 would have to rally 90% to keep the average unchanged, again according to Goldman.

The discrepancy between growth and value is still at historical proportions.

Bloomberg has opined the rotation is “just getting started.” The Newswire referenced March 7, 1986 as a day of significance. This was the last day the Russell 2000 closed with a higher price than the NASDAQ 100.

Bloomberg writes the current drawdown between the Russell 2000 and the NASDAQ 100 from its two-year high is just over 16%. Going back over the past thee and half decades, there has been only occasion when declines exceeded 20% and the was the bursting of the dot com bubble. The biggest difference between today and 20 years ago is the velocity of the change. It occurred in less than 15 trading days.

Bloomberg states momentum is now on the side of value, perhaps suggesting major structural changes that are akin to March 1986.

Over the past month, there has been a general breakdown in the correlation of various market measures. Bloomberg writes the albatross around the neck of richly valued mega caps whose valuation hinges so much on “hopes and dreams—i.e. an aggressive net present valuation of earnings into the distant future” are interest rates. Roughly speaking, interest rates fully commenced their multi decade decline in March 1986.

Is growth, value and interest rates (and indexing) at the other spectrum end of the bookend?

Unfortunately, no one knows this answer but if history is any type of a guise, trends can move in either direction by an amount much greater than ever anticipated, trends that could create or break fortunes.

What will happen today?

Last night the foreign markets were mixed. London was down 0.61%, Paris down 0.07% and Frankfurt down 0.31%. China was down 1.19%, Japan up 0.50% and Hang Sang up 0.31%.

The Dow should open nominally lower. Oil is up another 2% following yesterday’s 4.3% jump on demand optimism to the highest level since early March. Asian demand is higher today than it was pre-pandemic. Wow!The 10-year is up 3/32 to yield 0.87%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.