The Reopening Trade

Growth stocks have outperformed value stocks going back to the last bull market’s start in 2009. It’s usually the opposite, which has been a source of immense frustration for value investors. However, diving into the charts you can see the performance gap is heavily influenced by two things: the two years between March, 2018 and March, 2020 and this year’s performance of the “stay-at-home” growth stocks. More recently, we’ve seen evidence of the so-called reopening trade, which has helped value. That trade is buying cheap and cyclical stocks that would benefit when the economy reopens.

Growth versus value chart 2009- 2020

This trade has come in fits and starts. When markets are optimistic about Covid, value and the rest of the reopening trade stocks have done well. When people are pessimistic, the opposite occurs. We saw this last week when technology stocks outperformed as Covid-19 cases increased nationally and hopes for a massive stimulus faded after the election results.

Today’s News

But Pfizer’s vaccine news this morning changed things. The futures market went from indicating a nice day for stocks with slight outperformance for the Nasdaq to a massive rally for most stocks except the Nasdaq. And that didn’t reverse when the market opened.

Morningstar style box chart showing value beating growth

This is a style box chart from Morningstar showing how growth and value stocks performed after the market opened this morning.

Massive day for value, good day for growth.

Is Value Back?

One of the hardest questions to answer for patient value investors is when will value turnaround? We know it can’t underperform forever, but we don’t know when it’ll turn. That’s one of the things that makes investing so difficult (see other mistakes to avoid). You put a good process in place and the market may or may not reward you within your desired timeframe. The hope was that as we entered a new market cycle and recovery with the bull that began in March, market leadership would broaden, growth stocks would cool off, and people would rotate into value. We’ve seen evidence of this the past few months. Today we saw a lot more.

What Now?

Does that mean value’s relative struggles are over, and a new market regime is underway? Not necessarily. The reopening trade could falter, further vaccine or other Covid related news could get worse, etc. But it’s another strong indicator that investors want to eventually rotate into value stocks that should replenish value investors’ patience reserves, or cause you to want to buy some value stocks. See Portfolio Changes to Consider Now for three additional investment moves you can make in this environment.