Stocks were mixed Tuesday, but the overall tone of the market was clearly positive. Investors sold tech growth stocks that had rallied during the coronavirus pandemic, and rushed into value names.
The Dow Jones Industrial Average rose 262.95 points, or 0.90% to 29,420.92. The tech rout weighed on the S&P 500 and the Nasdaq Composite, sending them down 4.97 points, or 0.14% to 3,545.53, and down 159.93 points, or 1.37% to 11,553.86, respectively.
Although the major indexes were mixed, the market was far more optimistic than those metrics. By midday, advancing stocks on the NYSE outnumbered decliners by a 7:3 ratio, according to Gorilla Trades Strategist Ken Berman.
“Risk-on sentiment appears back in town after a disappointing September and October,” JJ Kinahan, chief market strategist at TD Ameritrade, wrote in a note. “The election is behind us and there’s hope that the two parties can agree on some sort of stimulus between now and Jan. 1 and work together to achieve something for the economy.”
The economic recovery been fairly V-shaped, but with the high likelihood of a split Congress, fiscal stimulus may come in at $1 trillion or less (Jefferies estimated last week that it could be as low as $500 billion), which would still provide liquidity to small businesses and unemployed households. More parts of the general population would be in a better economic position when a vaccine finally hits the market. Indeed, Pfizer (ticker: PFE) and BioNtech (BNTX) said Monday their jointly produced Covid-19 vaccine is 90% effective in patients that have not contracted the virus. That news sent stocks soaring Monday, and some of the optimism trickled into Tuesday.
Stocks primed for a reopening economy continued to gain. Southwest Airlines stock (LUV) rose 2.1% Tuesday for a two-day gain of 12%. Discount retailer TJX (TJX), which relies mostly on foot traffic for sales, tacked on 2.2% Tuesday for a 17% two-day gain. The yield curve has expanded aggressively, a huge positive for bank profitability. The SPDR S&P Bank ETF (KBE) rose 1.3% Tuesday and is up 15% in the past two days.
Stocks that soared during the pandemic cratered. Zoom Video Communications (ZM) fell 9% Tuesday, and is down 25% in the past two days.
Value stocks also have a lot to gain and that’s not only because near-term earnings estimates could potentially explode with the emergence of a vaccine. The valuation gap between value and growth has rarely been wider, most strategists pointed out.
Still, growth companies are highly innovative, and have a long runway of earnings drivers ahead. Some of their valuations may be justifiably higher than what the market is suggesting this week.
“Recent [Zoom] Selloff a Buying Opportunity,” wrote Mizuho Securities analyst Siti Panigrahi in a note. “We continue to see Zoom as benefiting even in a post-Covid-19 scenario, as its videoconferencing solution has become a critical component of how companies communicate during Covid-19, while the pandemic has also increased the recognition of its long-term importance.” Panigrahi’s model shows roughly $3 billion in annual revenue could be added through new products, which aren’t yet reflected in estimates. Revenue in 2021 is currently expected at a bit over $2 billion.
Value may be having its well-deserved day or days in the sun, but dumping growth might not be the right move.
Email: Jacob Sonenshine at firstname.lastname@example.org