Ridiculed Value-Stock Bets Look Brilliant on Vaccine News

(Bloomberg) -- Much-maligned value stocks are surging after a potential breakthrough in the race for a Covid-19 vaccine ignited a global risk-asset rally.

The Russell 1000 Value Index rocketed 5.7% higher on Monday, the most since early April, after 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. That cohort is outperforming the tech-heavy Nasdaq 100 Index by the most since 2008 as the stay-at-home trade stumbled, led by a plunge in Peloton, Netflix and Zoom.

It’s a potential reversal of fortunes for value stocks -- those that look cheap relative to fundamentals -- which have been battered this year as coronavirus lockdowns descended around the globe. These restrictions favored super-sized tech companies, with investors wagering that the likes of Amazon.com Inc. and Apple Inc. were best poised to weather the pandemic. However, the possibility of an effective vaccine could be the catalyst needed for a leadership rotation in equity markets.

“If you layer in this news on a vaccine, I think you still start to see this leadership rotation from growth and technology into value and cyclical,” said Jeff Mills, chief investment officer for Bryn Mawr Trust. “This news is going to be important for the leadership backdrop of the market.”

The value strategy’s comeback has eluded investors for years. The Russell 1000 Value Index is still down about 4.8% this year, while the Nasdaq 100 is still over 40% higher year-to-date. Financial shares -- the largest weighting in the Russell value index -- have been crushed by low interest rates and a still-flat yield curve.

However, a broad selloff in Treasuries on Monday boosted bank stocks by the most since March. Meanwhile, shares of airline and cruise companies surged amid budding optimism over the economy’s eventual reopening. And the small-cap Russell 2000 Index climbed as much as 6.2% for its best day since May.

“That will, in fact, light a fire under the rotation out of what has been working -- megacap technology and health care names -- and into economically sensitive cyclicals,” Arthur Hogan, chief market strategist at National Securities Corp., said by phone. “We’ve seen fits and starts of that rotation over the course of the last couple of months but clearly needed news on the vaccine front to really start that in earnest.”

©2020 Bloomberg L.P.