Rising optimism in the economy is popping up everywhere.
Let’s be honest. For the average person, the economic crisis spurred by the coronavirus is going to be long and deep. The official figures out of both Ottawa and Washington regarding job losses say it all.
Yet signs are growing in the stock market that investors see the recovery from the coronavirus already taking hold with shares of banks, energy companies, and small firms soaring. Ironically, previous sure bets that stood to benefit from quarantine measures, such as Peloton and Zoom Video, are starting to fall in value. Airlines and cruise lines, which had been battered by the pandemic, are back on the way up.
The upshot is that as states and countries reopen for business and the COVID-19 curve gradually flattens, investors are expecting a monumental shift. The logic goes that if people believe things are starting to bottom out, they will begin to look at more cyclical areas of the economy.
By way of example, a Dow Jones market neutral index of value stocks that goes long on the cheapest stocks and shorts growth shares enjoyed its best day in 18 years on Tuesday, while styles including momentum stumbled. The sharp rotation was seen again Wednesday, and is raising hopes for a change of fortune in the 10-year trouncing the buy-low philosophy has suffered.
Elsewhere, the Russell 1000 Value Index rose 2.1% Wednesday, beating its growth counterpart by 1.5 percentage points. The divergence was evident at the stock benchmark level too, the Dow Jones Industrial Average up 2.2% while the tech-heavy Nasdaq rose just 0.6%.
Analysts from Goldman Sachs have noted that sentiment and positioning measures remain bearish, even as the risk recovery continues. That’s leaving some investors worried about the possibility a massive rotation and of being left behind if an economic recovery proceeds smoothly.
“The risk of rotation frustration increases as markets turn more bullish on growth—as a result, we only position selectively in reflationary, procyclical trade ideas,” the analysts wrote in a May 27 report. “The growth recovery might be bumpy due to risk of second COVID-19 waves and potential second-round effects from the lockdown, such as a pick-up in bankruptcies, defaults, and a continued weak labor market.”
The road will indeed be bumpy. Ordinary Americans and Canadians are feeling the strain, and there is no guarantee of immediate relief. But the gradual lifting of lockdowns in both North America and around the world is a sign of optimism for everyone in the long run.