Value investors lose out again post-election: 'No blue wave, rotation on hold'

Published Sun, Nov 8 20206:54 AM ESTUpdated Sun, Nov 8 20206:34 PM EST

(This story is for CNBC Pro subscribers only.) For value investors waiting for a grand rotation after the election, they might end up disappointed yet again. Many on Wall Street were betting on a revival of value stocks on the belief that a potentially "blue wave" could help approve a massive fiscal spending package that benefits cheap names whose rebound depends on a broad economic turnaround. However, the odds of a unified government have waned with both of Georgia's Senate races going to January runoffs. A divided Congress could restrict the incoming Biden administration's ability to pass large-scale fiscal stimulus, hurting value stock's chances to outperform their growth counterparts, Wall Street strategists said. "A Democratic victory without Senate control would reinforce market trends such as the hunt for yield and growth stocks," BlackRock strategists said in a note on Saturday. "A Biden divided government could crimp fiscal stimulus, and cap rises in bond yields and inflation expectations." Joe Biden is projected to defeat incumbent Donald Trump in the presidential election, according to NBC News . However, the Senate control is still in limbo. GOP Sen. Kelly Loeffler and Democratic challenger Raphael Warnock as well as GOP Sen. David Perdue and Democrat Jon Ossoff are both likely headed to runoffs in early January. On Wednesday following Election Day, value had its worst day versus growth in 20 years, according to Bank of America, as tech stocks soared with the likelihood of higher taxes and tighter regulations decreased. "No blue wave, rotation on hold," Emmanuel Cau, equity strategist at Barclays, said in a note. "Volatility is thus likely to remain elevate and the recent rotation, which saw bond yields rising and Value outperforming ... could be halted for now." Wall Street now largely expects a smaller stimulus deal with a potentially gridlocked Congress. Goldman Sachs on Friday lowered its base case for the next aid package to under $1 trillion and projected slowing growth in the months ahead. The Washington Post reported Friday that a new stimulus deal is not expected to come from the White House. Instead, Senate Majority Leader Mitch McConnell is expected to push through a "skinny" aid package, which has been dead on arrival with House Democrats. The election week's biggest underperformers include many economically sensitive areas of the market such as energy, utilities and financials. Bond yields, which had risen on the expectations that big stimulus spending could result in more government debt and inflation, also fell from multi-month highs. Meanwhile, investors piled back into the so-called FANG names, which had been selling off leading up to the election. Shares of Microsoft and Facebook have surged double digits in the past week, while Amazon , Apple and Google-parent Alphabet all rallied more than 8% in that period. Many said the increased odds of a divided Congress also mean it's less likely to impose capital-gains tax hikes, which could have prompted investors to sell tech winners to avoid higher levies in the future. "There was concern that if you did get that blue wave you would start seeing people start selling off the big winners they had which obviously was big tech in order to save that capital gains tax." said Quincy Krosby, Prudential's chief market strategist. — CNBC's Michael Bloom contributed reporting.

A trader smokes a cigarette outside the New York Stock Exchange in the Manhattan borough of New York City, two days after the 2020 U.S. presidential election, New York, U.S., November 5, 2020.

Carlo Allegri | Reuters

(This story is for CNBC Pro subscribers only.)

For value investors waiting for a grand rotation after the election, they might end up disappointed yet again.

Many on Wall Street were betting on a revival of value stocks on the belief that a potentially "blue wave" could help approve a massive fiscal spending package that benefits cheap names whose rebound depends on a broad economic turnaround.

However, the odds of a unified government have waned with both of Georgia's Senate races going to January runoffs. A divided Congress could restrict the incoming Biden administration's ability to pass large-scale fiscal stimulus, hurting value stock's chances to outperform their growth counterparts, Wall Street strategists said.