Wednesday, September 11, 2019
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The next great rotation
The first two days of this week may have seemed fairly unremarkable in the stock market. And in fact, even more than unremarkable — on Monday, the S&P 500 dropped 1 basis point; on Tuesday, the S&P 500 rose 3 basis points.
Seen this way, almost nothing has happened this week. But beneath the surface of a seemingly placid market there have been two brutal days for trades that were defining parts of the narrative over the last few months — SaaS and the U.S. consumer.
And amid this carnage, we’ve seen a great rotation away from the momentum names that have been loved in this market and into the value plays that have been hated.
On Monday, growth stocks felt most of the pain, particularly newer entrants to public markets with names like Okta (OKTA), Twilio (TWLO), The Trade Desk (TTD), Zoom Video (ZM), and Slack (WORK) each dropping 5% or more. And while we joke that Beyond Meat (BYND) has become a SaaS play in this market, that stock, too, was down over 4% to start the week.
The iShares momentum factor ETF MTUM (MTUM) fell 1.7% on Monday, with momentum’s drop relative to value logging its single-largest decline since at least 2013, according to Bespoke Investment Group. And with rates rising on Monday, financials outperformed for the first time in over a month.
On Tuesday, the U.S. consumer-centric trade that has been driving optimism about not only the market but also the economy was taken to the woodshed. McDonald's (MCD), Starbucks (SBUX), and Chipotle (CMG) shares all dropped more than 3%, while shares of Visa (V) and Mastercard (MA) both lost more than 2.5%. Banks outperformed again on Tuesday.
During both sessions, the small cap Russell 2000 — which has lagged the S&P 500 all summer — also outperformed markedly, rising more than 1% during each of the week's first two trading days.
Now, rotational stories during any one market session lead to all kinds of narrative creep. Did news over the weekend that The We Company is facing a more than 50% haircut during its IPO process weigh on hot tech stocks on Monday? Did news that Wendy's (WEN) is pushing into breakfast while investors still take stock of Starbucks' (SBUX) guidance cut last week weigh on consumer names on Tuesday?
There were probably folks making both cases.
But as we’ve seen at various points during this bull run, the first two days of this trading week look like classic rotations out of what’s been working and into what hasn’t, as Bloomberg’s Luke Kawa wrote Tuesday.
The market’s moves, in other words, are not about news of the day but flows of the day. As Nick Colas at DataTrek Research wrote on Tuesday, "We’re long past the days where money managers had consistent fresh inflows of new investor capital to sprinkle around. Rebalancing portfolios means a dollar-for-dollar exchange of 'out with the old, in with the new.'"
In a note to clients on Tuesday, JPMorgan strategist Marko Kolanovic outlined how he sees positioning (hedge funds equity exposure is near post-crisis lows and investor sentiment as measured by the AAII is at decade lows), and factor divergence (momentum’s outperformance relative to value is worse than any historical factor divergence, according to Kolanovic) as creating an unbalanced market that is now, well, balancing.
And for the bulls, this rotation might offer a path towards new highs for the stock market.
“We believe that the value rotation can continue and the broad market could move higher going into October [trade] negotiations,” Kolanovic wrote Tuesday, “and if real progress is made, continue into a more sustained rally.”
“Given that the S&P 500 is heavy in bond proxies and secular growth, we would expect higher upside potential in small caps, cyclicals, value, and Emerging Market stocks than the broad S&P 500. If the October negotiations fail, these moves could be unwound, but given the extreme low positioning and style tilt, we think the downside is limited.”
We’ll see if this rotation continues on Wednesday.
What to watch today
7:10 p.m. ET: Aurora Cannabis (ACB) is expected to report an adjusted earnings loss of 5 cents per share on $107.92 million in revenue, according to analysts polled by Bloomberg.
7 a.m. ET: MBA Mortgage Applications, week end September 6 (-3.1% prior)
8:30 a.m. ET: PPI Final Demand month-on-month, August (0.1% expected, 0.2% in July)
8:30 a.m. ET: PPI excluding Food & Energy month-on-month, August (0.2% expected, -0.1% in July)
8:30 a.m. ET: PPI Final Demand year-on-year, August (1.7% expected, 1.7% in July)
8:30 a.m. ET: PPI excluding Food & Energy year-on-year, August (2.2% expected, 2.1% in July)
10 a.m. ET: Wholesale Inventories month-on-month, July final (0.2% expected, 0.2% prior)
Surprise takeover bid from Hong Kong for London Stock Exchange [Yahoo Finance UK]
China exempts certain products from tariffs [Bloomberg]
Apple Event: Here's everything the tech giant revealed [Yahoo Finance]