Investors continued dumping tech stocks and moving into more economically sensitive areas of the market on Tuesday as vaccine-driven optimism about the recovery remained high. That has also lifted bond yields—adding fuel to the growth-to-value rotation.
Under the surface on Tuesday, the shift into value stocks continued. The Industrial Select Sector SPDR ETF (ticker: XLI) gained 1.8% and the Energy Select Sector SPDR ETF (XLE) rose 1.7%. The Technology Select Sector SPDR ETF (XLK), meanwhile, lost 1.1%.
News Monday that a Covid-19 vaccine is within sight has fueled optimism about the economic recovery in 2021. That has accelerated a rally that began last week, when the results of the U.S. presidential and congressional elections began to appear more certain. Expectations of a Joe Biden presidency and a divided Congress had pushed stocks higher.
On Monday, Pfizer (PFE) and its partner BioNTech (BNTX) announced preliminary readings that showed their vaccine candidate was more than 90% effective in preventing Covid-19 in the nearly-40,000 trial volunteers who had received the required two doses.
Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, called the result “extraordinary” and said a vaccine developed using a similar technique from Moderna (MRNA) was also likely to succeed. And after U.S. markets closed on Monday, Eli Lilly & Co. (LLY) said its Covid-19 antibody treatment was approved for emergency use by the U.S. Food and Drug Administration.
Faster economic growth and inflation expectations have lifted bond yields as the stock market has rallied. The yield on the 10-year U.S. Treasury note hovered around 0.95% on Tuesday, near its highest level since March. Bond yields rise when prices fall.
That also favors value stocks over growth. Valuations of companies that are expected to earn the bulk of their profits far down the road rise when discount rates are low—and vice versa.
European stocks that had surged Monday—including eurozone banks, which jumped nearly 14%—continued to rise, with the German DAX up 0.5% Tuesday while the French CAC 40 and U.K. FTSE 100 closed up 1.5% and 1.8%, respectively.
The price of oil gained, with WTI up 2.3%, to more than $41 a barrel, and Brent rising 2.2%, to $43.30 a barrel. The U.S. Dollar Index—which tracks the greenback against a basket of other currencies—ticked up less than 0.1%.
The vaccine news may have the unintended effect of limiting further stimulus, the size of which was already in doubt after the Republicans appeared likely to retain control of the U.S. Senate in 2021. “A potential reduction in the level of intervention needed has strengthened the dollar. The broad risk rally felt a bit tired overnight, possibly as the market digests the news,” said Rony Nehme, chief market analyst at Squared Financial.
The Federal Reserve, in a report released after markets closed on Monday, warned the stock market was pricing in a strong recovery. “Given the high level of uncertainty associated with the pandemic, assessing valuation pressures is particularly challenging, and asset prices remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken,” the central bank said in its financial stability report.
In addition to the macro-driven swings, several individual stocks were moving on news on Tuesday.
Shares of BioNtech rose 3.2% after the company beat revenue estimates and posted a narrower net loss than expected. The stock has rallied spectacularly this week, as it got a boost from the apparent effectiveness of its Covid-19 vaccine jointly produced with Pfizer, whose stock slipped 1% Tuesday after soaring on Monday.
Peloton (PTON) gained 5.6% after announcing a partnership with Beyonce. Other stay-at-home beneficiaries were down: Zoom Video (ZM) dropped 6.2%, Amazon.com (AMZN) lost 2.7%, and Salesforce.com (CRM) fell 4.2%. Microsoft (MSFT), the second-largest stock in the U.S. by market capitalization, was down 2.8%.
Shares of Wayfair (W) fell 3.9% as analysts at D.A. Davidson upgraded the stock to Buy from Neutral and maintained their $280 price target, suggesting 16% upside.
Raytheon (RTX) shares rose 4.1% after analysts at JPMorgan upgraded the stock to Overweight from Neutral and kept their price target of $79, reflecting almost 20% upside.
Write to Steve Goldstein at firstname.lastname@example.org