The Great Rotation

When Pfizer announced that the vaccine it had made in partnership with BioNTech had an efficacy rate of more than 90%, there was a strong rotation out of growth stocks into value stocks. Growth stocks are those with growth prospects greater than that of the general economy. As a result, investors are willing to pay more for these stocks and their respective earnings which translates into growth stocks attracting higher valuation multiples than the market average. An example of growth stocks would be the FAANGM (Facebook, Amazon, Apple, Netflix, Google and Microsoft) Big Tech stocks. Value stocks as the name suggests are those that are considered to offer “value” and are priced lower than the market average as evidenced by their lower valuation multiples. Cyclical stocks such as banks and industrials as well as energy stocks would fall into the value stock category.

The onset of the pandemic led to a bifurcation in stocks with pandemic beneficiaries such as the FAANGM outperforming the pandemic casualties such as cyclicals and energy stocks. However, the trend of growth stocks outperforming their value stock counterparts has reversed since the announcement by Pfizer.

Whether the trend of value stocks outperforming is sustainable remains to be seen. On the one hand a pandemic centric environment may no longer be the driving force behind markets. As economies begin to recover, beneficiaries of economic expansion typically include the likes of banks and industrials. Regardless of an economic recovery and expansion, growth stocks such as the FAANGM are likely to continue on their own disruptive growth path. The outlook for these two contrasting styles creates an interesting juxtaposition for investors and how they will position their portfolios as we move closer to the new year.