25 Nov HAPPY THANKSGIVING!! IS THIS ROTATION REAL?
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%.