Momentum Is No Longer King of the Stock Market, Vaccine Will Raise New Royalty

A powerful earthquake shook the core of many investment portfolios Monday. The rout for the Dow Jones U.S. Market Neutral Momentum Index was the largest one-day drop since its inception 18 years ago. The index mimics the performance of a strategy of buying outperforming stocks paired with short positions in the laggards. In practice, that currently means buying big technology companies, while reducing exposure to small-caps and value; one of the defining trends of the global equity market in 2020. The surprising efficacy of Pfizer’s vaccine trial data has clearly thrown a wrench in one of the year’s strongest investment themes (see Horizon Investments’ Market Notes from November 9 for more details on what we see as the implications from that news). Hedge funds in the third quarter counted Microsoft, and Facebook as their three largest positions, according to Bloomberg’s aggregated 13-F filing data. Pension funds counted Microsoft, Apple,, Facebook and Alphabet as their five largest exposures.

While it’s quite early to declare that beaten down value and small-cap sectors are set for a multi-year bull run over growth — there are many bumps in the road not least of which is the logistics of vaccine distribution, Covid case counts and dramatically rising hospitalizations — we believe the violent move should start the countdown clock ticking towards a normalization of earnings for value stocks as a post-pandemic world comes into view. We have long said that fundamentals need to accompany price action for a trend shift to be sustainable. Those fundamentals took a major step forward this week.

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