Rotation Trade Turns to Duck-and-Cover as Coronavirus Runs Amok

(Bloomberg) -- All year, it’s been the same question in the stock market. How much distress can investors live with in the here and now as they await relief in the future? On Thursday, the pain threshold arrived.

A darkening U.S. coronavirus outlook dashed hopes for a swift economic reopening and upended the latest attempt at a rotation trade. The S&P 500 slid 1% and small caps in the Russell 2000 lost twice that. Stocks sensitive to the economy’s prospects plunged, led by banks and makers of nonessential consumer products.

The Nasdaq 100 also declined, as cities from Chicago to Minneapolis reinstituted lockdowns. But the tech-heavy index outperformed for a second day, led by names such as Zoom Video Communications Inc., DocuSign Inc. and Workday Inc. -- companies coveted for their ability to generate profits in the stay-at-home environment.

That’s a reversal from the start of the week, when a potential breakthrough in Covid-19 vaccines breathed life into banks and other stocks that benefit more from economic growth. But growing signs that economic activity is slowing overshadowed that optimism. Only about a quarter of workers among 10 large U.S. metro areas returned to the office last week, while New York reintroduced indoor gathering limits. Efforts to contain the spreading virus will continue to weigh on the economy in the months before a vaccine is widely available, according to Wells Fargo Investment.

“It’s still premature to jump from the work-from-home trade to the back-to-normal trade,” said Sameer Samana, senior global market strategist at the firm. “Covid cases and containment measures are increasing now and will drive consumption and activity in the coming quarters.”

A basket of stay-at-home stocks is 3.6% higher over the past two days, after plunging nearly 9% to start the week following a large-scale study of the Covid-19 vaccine being developed by Pfizer Inc. and BioNTech SE showed it prevented more than 90% of infections. Meanwhile, a basket of reopening stocks that holds airlines, cruise line and hotels is 6.5% lower over the past two days.

Read more: Southwest Warns Revenue Rebound Has Slowed as Infections Climb

Economists at Goldman Sachs say the recent virus resurgence poses a key risk to the economic outlook. Though consumer spending and jobless claims have been less impacted than they were during the summer wave, the resurgence is still in its early stages and risks are growing, wrote a team led by Jan Hatzius. High-frequency data from OpenTable, for instance -- a measure of restaurant bookings -- show “a significantly larger decline in indoor dining activity in states with higher case growth, suggesting that virus-sensitive industries could be showing early signs of a growing virus hit,” they said.

To Torsten Slok, chief economist at Apollo Global Management, the rise in cases could have a negative impact on mobility, shopping and restaurant bookings even if the U.S. does not undergo additional lockdowns similar to the ones currently in place across many parts of Europe.

“More cautious consumer and corporate behavior could have a negative impact on the economy, in particular if the lack of a lockdown means that the virus will be a problem for a longer period,” he wrote. “It looks like this will end up being a W-shaped recovery.”

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