Breakingviews - Vaccine trade may redraw outdated stock boundaries

A nearly empty trading floor is seen as preparations are made for the return to trading at the New York Stock Exchange (NYSE) in New York, U.S., May 22, 2020.

NEW YORK (Reuters Breakingviews) - Unwinding the Covid-19 trade could get messy. Pfizer’s announcement on Monday about the surprising effectiveness of its vaccine sent stocks up overall but battered some lockdown-friendly firms, like Zoom Video Communications, which has since tanked by around 25% to a market capitalization of $107 billion. Meanwhile, many leisure-related names shot up double digits, like $24 billion Delta Air Lines. This reversal may scramble traditional equity classifications.

Markets shifted dramatically after Pfizer’s jab news. An iShares exchange-traded fund reflecting the momentum factor is since down over 4%, meaning investors got hit for holding equities that have recently performed well. And the U.S. 10-year Treasury yield has jumped by over one-sixth to 0.98%, indicating investors have less appetite for the ultimate safe asset and possibly expect more inflation.

Wall Street analysts at shops from Goldman Sachs to JPMorgan suggested this could signal the revival of long-underperforming value stocks – those offering metrics like low price-to-book ratios – as investors unload faster-growing companies.

Investors previously seeking pandemic safety in skyrocketing technology companies might now be willing to hold stocks more dependent on overall economic activity including in-person pursuits. Hence the gains for Delta, movie-theater chain AMC Entertainment and the like, against selloffs for Zoom and virtual exercise upstart Peloton Interactive.

But looking at it through a value-versus-growth lens could be a mistake. True, the S&P 500 Value Index has notched a 5% gain since the weekend. But one of its biggest holdings, as of Oct. 30, was $215 billion Pfizer, and another was $536 billion Berkshire Hathaway, which revealed massive share buybacks two days earlier. “Value” credentials probably weren’t the main driver in either case.

Investors did unload technology stocks, like $1.5 trillion – growth companies that have powered most of the S&P 500 Index’s gains this year. But swapping into holdings that should benefit from an earlier-than-anticipated return to normalcy signals a rational change in expectations, not a shift in strategy – especially when the Federal Reserve is expected to keep underlying interest rates low for years.

The traditional concept of value is also being challenged. A recently revised academic study suggests that metrics like the comparison of market value with book value don’t capture the true worth of intangible assets, like brand names, that proliferate at many so-called growth companies. Some trends may reverse, but redefining 20th-century investment categories is one that should continue.


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