With the accelerated rollouts of COVID-19 vaccines, you may think the stay-at-home trade is over, and the “reopening” stocks are the ones to buy today. But is that really true?
Don’t look now, but after a rough start to the year, stay-at-home technology stocks surged last week and have been generally beating the market since mid-March. In fact, the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ), which mirrors the Nasdaq 100, is now ahead of the more cyclical and value-oriented small-cap index the iShares Russell 2000 ETF (NYSEMKT:IWM), not only for the week, but also over the past month. That’s a reversal of the trend from January and February.
Here’s why investors may be counterintuitively looking to e-commerce, software, security, and other stay-at-home stocks these days, even as the economy is on the cusp of reopening — and why the rotation back to large-cap growth stocks could continue.
The 10-year yield may have topped out
One of the reasons low-priced value and cyclical stocks surged in the first quarter, while “expensive” growth stocks fell or remained subdued, was a rapid rise in the 10-year Treasury Yield. The 10-year is a benchmark against which banks price many products, and which investors use as a baseline for their discount rates used in measuring the intrinsic value of a stock. Basically, the higher long-term rates are, the less future are earnings are worth relative to today.
However, the 10-year yield has recently put in a top — at least in the near term. After increasing in January, February, and then March, the yield on the 10-year has stalled out and actually dipped in the early part of April.
Now, it’s hard to say where rates will go from here. After all, the 10-year yield is still a little bit below where it was just before the pandemic. Assuming the COVID-19 relief bill overstimulates the economy, and/or President Biden’s infrastructure bill is passed, rates could still go higher.
Nevertheless, there were valid reasons for the low rates seen before the crisis, including demographic headwinds, technological disruption, and bond-buying from the Federal Reserve. Should rates stall out here, the growth stocks that were doing so well before and during the early part of the pandemic could regain their momentum.
The market is forward-looking
The economy is just on the cusp of reopening, which should benefit cyclical and “out-of-home” stocks. The only problem? The market already knows this. Starting with the news of successful COVID vaccines in November, and then accelerating with falling COVID cases starting around February, investors have likely extrapolated a full economic reopening by now.
In fact, investors may have anticipated not only a reopening, but an economic boom. For instance, all the major cruise line stocks have risen recently, with most analysts pricing these companies off of their 2023 earnings estimates (the soonest “normal” year)….
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