An effective vaccine could be the turning point for value stocks, but perhaps not just yet

Published Sun, Nov 15 20201:01 PM EST

Value stocks have been on a tear in the last week after positive vaccine news from Pfizer and BioNTech raised hope of the U.S. economy staging a fast recovery next year. However, investors loading up on beaten-down value names should brace for some volatile swings as risks to the group linger. The iShares Russell 1000 Value ETF ( IWD ) rallied 5.7% last week after Pfizer and BioNTech said Monday that their coronavirus vaccine candidate was more than 90% effective at preventing the coronavirus during a late-stage trial. Value's gain came at the expense of high-flying growth stocks. The iShares Russell 1000 Growth ETF ( IWF ) lost 1.2% last week. Last week's strong performance in value names could mark the start of a turnaround for the much-maligned group of stocks as it trades near an all-time low relative to its growth counterpart. But value stocks still face a slew of risks that could curb their rally, including a resurgence in coronavirus case. "We continue to expect an eventual rotation to Value as the economy fully reopens," Ed Clissold, chief U.S. strategist at Ned Davis Research, said in a note. However, "a few days of Value strength will not unwind a historically oversold condition." Clissold recommends investors stay nimble when investing around this value-versus growth shift. A CNBC analysis found the performance gap between value and growth stocks was near an all-time high, with growth names nearly doubling the gains of their value counterparts since May 2000. The outperformance really picked up this year as investors piled into the tech names that performed well during the coronavirus pandemic. Two examples of such growth stocks are Amazon and Zoom Video . With people spending more time at home, people have been more reliant than ever on these two companies for shopping and remote working. Amazon shares are nearly 70% year to date and Zoom has skyrocketed about 500% in 2020. Value names such as cruise operator Carnival and United Airlines, meanwhile, have struggled as the pandemic essentially shut down the travel industry. Carnival is down more than 68% year to date and United has lost 55.9% in 2020. But the tables were turned by Pfizer and BioNTech's announcement, which sparked the biggest one-day outperformance by value stocks over growth on Monday, Clissold of Ned Davis Research said. However, he also pointed out that days of sharp outperformance in value are usually accompanied by sessions in which growth swings back violently. "Of the 15 days when the Russell 1000 Value outperformed the 1000 Growth by at least 3%, 13 occurred in 2000-2001, 2008, or 2020," said Clissold. "The volatility cuts both ways. All 20 cases of the Russell 1000 Growth outperforming the 1000 Value by at least 3% came in 2000- 2001 or 2020." Christian Fromhertz, CEO of The Tribeca Trade Group, said traders could get hurt chasing this kind of "knee-jerk reaction" to a piece of news. "I'm a little bit concerned that this market is moving this fast," said Fromhertz. "Sometimes you get knee-jerk reactions the other way. I think it's best to let thing settle down a bit" before making your move. There is also the possibility investors are reacting too positively to the Pfizer and BioNTech's announcement as neither company has released the full data from the trial. Market overly optimistic about vaccine? Jeylan Mammadova, global sector lead for health care at research firm Third Bridge, said there are questions among industry experts regarding the Pfizer-BioNTech vaccine's "durability," or the amount of time it provides patients with immunity. Mammadova also said some trials of vaccines using the same Moderna-based platform as the Pfizer-BioNTech vaccine have shown "potentially poor" immune responses. "This is where we become concerned about the long-term effects [of the drug] and the protection of mRNA-based vaccines across the population," Mammadova said. "So we're concerned about the market reacting a little bit optimistically to the 90% effectiveness rate" announced by the two companies. Pfizer said in the announcement Monday it planned to submit the Phase 3-trial data for peer-review publication. If future vaccine data show the drug is not as effective as previously thought, investors who loaded up on value stocks and dumped growth could get burned, Mitchell Goldberg, president of ClientFirst Strategy. "We've had a lot of headaches along with way with vaccine trials," said Goldberg. "Investors first get excited. Then, they say the rotation is here. And then there's a problem with the vaccine trial. After that, the market goes back to large-cap tech stocks, and the trade is reversed." Goldberg added that, while Pfizer adds a lot of credibility, "a healthy dose of skepticism is a good thing." He also advised investors to "remain diversified" and maintain exposure to both growth and value names. Coronavirus cases on the rise Value's rally could also be thwarted by the recent uptick in U.S. coronavirus cases. On Thursday alone, the U.S. recorded more than 150,000 new coronavirus infections, pushing the country's seven-day average to 131,445 . The seven-day averages for Covid-19-related hospitalizations is also rising along with the number of virus deaths. A rising count of coronavirus cases could lead to the re-implementation of lockdown measures seen during the early days of the pandemic. This would, in theory, make value stocks less attractive as it could delay a broader economic recovery. Some states and cities have already responded to the spike in cases by re-imposing stricter protocols to curb the outbreak. In New York, curfews on restaurants, bars and gyms went into effect on Friday. Chicago's mayor also asked residents to cancel Thanksgiving plans and stay indoors . This increase in cases briefly halted value's rally this week. On Wednesday, the iShares Russell 1000 Growth (IWF) ETF jumped nearly 1.9%, and its value counterpart slid 0.3%. The rising number of coronavirus cases also sparked a broad-based market sell-off on Thursday in which the S & P 500 dropped 1%. That day, the IWF declined by 0.6% and the value IWD ETF dropped 1.3%. "I think there's too many people who are positive. I think you let it come in a little," CNBC's Jim Cramer said Thursday morning . "I'm beginning to worry that there are companies that really had their hopes up and their hopes are dashed, but there's nothing replacing it until this amorphous May period" when a Covid-19 vaccine could be more widely available. Tech has 'tentacles well beyond Covd-19' Another risk to value's rally is the fact that some investors may view declines in growth stocks, particularly technology names, as buying opportunities. "Technology, to a large degree, is the new defensive sector, encompassing all things internet, machine learning, e-commerce and the like," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. These "are trends that have tentacles well beyond Covid-19." Technology and tech-related stocks have been the market stalwarts of 2020. Facebook , Alphabet and Microsoft are all up more than 32% year to date. Amazon has rallied 69.3% in 2020, while Netflix is up 49.2% in that time period. Apple shares are up 62.5% this year. Sandven said that while value may outperform in the near term, "like the secular growers longer term and would view weakness as a buying opportunity" in those names.

Traders work the floor of the New York Stock Exchange.

NYSE

The iShares Russell 1000 Value ETF (IWD) rallied 5.7% last week after Pfizer and BioNTech said Monday that their coronavirus vaccine candidate was more than 90% effective at preventing the coronavirus during a late-stage trial. Value's gain came at the expense of high-flying growth stocks. The iShares Russell 1000 Growth ETF (IWF) lost 1.2% last week.