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Re-opening rotation trades are rocking the market: Morning Brief

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Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi discuss the market shift from stay-at-home stocks to growth stocks.

Video Transcript

JULIE HYMAN: But first, let's get to that reopening trade and what we've seen thus far this year, which is sort of a bizarro version of 2020. Myles wrote about that in this morning's Morning Brief. In other words, last year, of course, we saw big gains for big tech stocks, big e-commerce stocks, really gaining market share and gaining a foothold in our lives in a very different way. Everything from Zoom to Peloton to Amazon, of course, had a big 2020. And now we're seeing rotation out of some of those names and rotation not only into sort of leisure stocks, for example, travel and leisure, but also into things like industrials and utilities, sort of the more traditionally defensive areas of the market are also catching a little bit of a bid.

We saw that happen in yesterday's session. And that's been the trend thus far this year. And as we're showing there, Myles, you also brought us that chart from Bespoke, which talked about how all of this has affected what are the largest stocks in the market and what share they have of the market.

MYLES UDLAND: Yeah, I mean, I think, we've talked about the rotation trade. It feels like a million different ways over the last couple of months. But I highlighted this chart. And this chart actually came out on Monday. But I think it's as relevant as ever, especially in the context of what we saw during yesterday's trading session. And we all remember all the concern that was raised about market concentration, the FANG trade, all this market cap within the S&P going to just a handful of stocks. And indeed, it is still at a record level here. But this chart is another way of seeing that rotation out of, let's just call it everything that worked forever, even though it was only a couple of years, and into things that everybody decided to hate or had left behind.

And there were both stylistic and also fundamental reasons for that. And it's kind of a combination of 2017 era trades mashing with 2019 era into 2020. And now it's all coming undone. Because, Julie, as you mentioned, it's a way that we've said it on this program, and I think this is perhaps a simpler way to think about this rotation as well, is everything that had worked is no longer working. And everything that didn't work now does work. And in the last six months, we've seen a huge rally in small caps. We've seen financials have their best period in quite some time. And kind of ignored is that big cap tech stocks-- Amazon, Facebook, Alphabet. These stocks are flat over the last handful of months, even down a little bit depending on exactly where you draw the line from, whether it's three months or six months.

And that's been a stealth laggard, I think, as far as I can see, within the market. We're so conditioned to talk about what's happening with big cap tech, what's happening with the FANG names, that now we're seeing just a period of those names kind of doing nothing. Last year, obviously, they were the stars of the show. As you can see here, that's kind of all reversed this year. And another point as well, Brian Sazzo, you flagged this this morning, we're also seeing some stealth bear markets, let's call them, call them what they are. And I know Jared Blikre hates to say bear market, or bull market, and individual security. But Peloton is off 20%. Zoom's off almost 40% from its highs.

A lot of his pandemic stars, the shine is starting to come off them. I think that says good things about where investors believe the economy is going. But it is a big reversal. And there's been so much momentum behind some of those names. It'll be interesting to see how quickly this kind of resolves itself because someone bought Zoom at $520 bucks a share. And now they're holding that back.

BRIAN SOZZO: Right Myles, and Julie and I had a very compelling tweet exchange this morning on Peloton. So weird. It's just weird to see Peloton shares down more than 20%, following a quarter where they just really blew it away like they did for the most part of 2020-- sales strong, they're are profitable company now, they suggested strong sales in 2021 despite the ongoing delays for their bikes and treadmills. But that trade has clearly unwind and we'll dig a look more into this later on the show. That money looks to have rotated in some of these re-opening trades really, which I think is the theme of your newsletter here. Look at the apparel players. We have a lot of apparel stocks simply on fire over the past few months. Nobody's talking about it, we are here at Yahoo Finance.

Myles, you almost have to wonder, what gets a stock like Peloton working again? Is it another acquisition? It's not just Peloton. Look at Okta. Their stock has come under a little bit of pressure here too after their earnings. Didn't look too bad. Nonetheless, it's under pressure here. It's a stock that worked very well last year when things were shutting down. They're out there now making an acquisition. What quiets the Street's concerns about very slowing growth in some of these stocks in 2021? Unclear right now, I'm unclear right now, Myles.

JULIE HYMAN: If I could just quickly say, Brian, maybe it doesn't happen in 2021. Maybe these guys just drift for a while and then the growth starts to look more impressive once we lap 2021. I mean, people are going to keep buying Pelotons, right? They're not going to buy them at the same rate, but they're going to keep buying Pelotons. And maybe Peloton will also sort of figure out its manufacturing issues. So for some of these companies, I wonder from a stock perspective, if 2021 just ends up being a water treading here, right? And then as we move past that, and these companies growth starts to look more impressive again on a relative basis, that that's when they pick back up.

BRIAN SOZZO: No, that's a great point, Julie, and effectively what you have is dead money trades in formerly a high flying stocks for the first part of-- really, the first part of the year until the Street gets comfortable what growth can look like as people get out there, vaccinated, and we get a return to growth.

MYLES UDLAND: And I think to that point, in some ways, those specific names kind of remind you of 2017 style crypto, right? It could be several years of dead money. I mean, the stocks were up 8, 10, 15x in some cases. It can take a long time to work off that sort of pull forward of how the business actually performs. And so I don't think that it's incompatible to say that Peloton continues to be the exercise equipment of choice in the US for a certain kind of consumer. Their business does amazingly well and the stock may also do nothing over a several year period in which the business improves. I think that's something we should certainly keep an open mind to.

And I don't think those ideas are necessarily intention. Just quickly before we move on here, talking about the mechanics of some of these trades, we've talked a lot about ARK Invest, ARKK, Cathie Wood's suite of funds, still under pressure there. Most of the components within all of those ETFs have been under considerable pressure in the last handful of trading sessions. There's some folks out there looking at this as a kind of potential systemic risk. I mean, they're open-ended ETFs. There are certainly pressures that can come in and create artificial distortions on the downside if there's a massive liquidity pull. It's not quite the same as a run on, say, a hedge fund or a closed-end fund or something like that.

But on a daily basis, and we'll see it again today all day on the tape, people are going to be looking at what is in these ETFs, the names that are in these ETFs, and how much they are down and how much that plays into the broader market. I don't think that can be ignored on a day where, again, the NASDAQ's off almost 3% yesterday, while the Dow is barely in the red, if not for that kind of end of day decline.