The Joe Biden presidency may further herald big changes for stock winners and losers, spurring choppy trading for discretionary and quantitative investors alike.
“Low inflation and falling yields have underpinned aggressive valuations across the technology sector and the building blocks are in place for these trends to reverse in 2021,” Eleanor Creagh, a strategist at Saxo Bank, wrote in a note.
U.S. value shares are beating growth stocks by 2 percentage points on Wednesday, MSCI indexes show. The momentum strategy -- which buys recent winners like haven technology stocks -- dropped 1.8%, according to a Dow Jones market-neutral index.
When yields and economic expectations are at their lows, investors seek protection in shares that offer a long-term profit story like Facebook Inc. and Alphabet Inc. Now, riskier companies that offer near-term cash flows such as value are rising while yields break out.
The Treasury yield curve steepened on Wednesday, with the 10- and two-year gap widening to the most since 2017. Five-year breakeven rates steadied around a two-year high. That suggests fresh support for trades sensitive to both the interest-rate cycle and economic growth.
Trend-chasing investors may also add fuel to the stock rotation. Commodity Trading Advisors are likely cutting long positions in Treasuries and adding bullish bets on oil futures, according to Masanari Takada, a strategist at Nomura Holdings Inc.
Another fillip to the reflation trade: Coronavirus infections potentially peaking at the end of this month, according to Andrew Sheets of Morgan Stanley. The strategist, an early champion of cross-asset reflation trades, recommends copper, a proxy for global growth, over gold.
“You should physically have cases declining quite rapidly between now and the end of the March,” he said in an interview on Tuesday. “Once the market feels like it’s the last peak, that’s a really important psychological moment.”
--With assistance from Ksenia Galouchko and Anchalee Worrachate.
This article was provided by Bloomberg News.