In recent months, we have been discussing the vulnerability of expensive and high-sentiment stocks as they have become a more and more concentrated part of the listed equity market. On November 9, the news of a potentially successful vaccine discovery by Pfizer unlocked a major shift in market sentiment, which continued through November 10. There were clear winners and losers from this rapid rotation.
The steepest declines occurred in the most expensive names with the strongest market sentiment (on our multi-dimensional measures of both themes). These declines also had a large impact on market indices due to company sizes. The ten largest negative contributors to the overall market return in this category were Amazon, Microsoft, Facebook, Apple, Nvidia, Paypal, Adobe, Zoom, Shopify, and Netflix. These all sit in the segment of the market that is most expensive, and which shows the most positive sentiment – and they all experienced sharp reversal on the vaccine news. While the MSCI World returned around 1.5% over those two days, these companies experienced an average return of -10%.
The stocks that were most heavily purchased by investors during those two days were highly risky, deep value stocks. We would characterize “deep value” as having a low price/book ratio; risk stocks are characterized by high beta and high volatility. Many of the companies in this category are Banks, Automakers, Energy stocks, and Real Estate. The most extreme quintile – low price/book, and high risk – had a return of 16% on average over two days. Banks and Energy stocks in this segment rallied 20% on average, and Real Estate went up 27%.
Expensive, high-sentiment names that have been strong beneficiaries of a locked down/online world, plus disruptors.
Examples: BNP Paribas, Citigroup, Truist Financial, ConocoPhillips, ING Groep, Canadian Natural Resources, Barclays, Phillips 66, Valero Energy, Banco Bilbao Vizcaya
What Did All the Other Stocks Do?
The most relevant single dimension of stocks that reacted to the news was price momentum. Figure 1 shows a very clear negative relationship between the stock price movement of MSCI World stocks and their current price momentum score.1
1Measured as 12 month price return excluding the most recent month. Source SSGA.