Investors Do A Little Holiday Value Shopping On Monday

The Nasdaq futures were rallying nearly 2% before the open as technology stocks decide to follow the Dow Jones 30. Many stocks rallied on Monday as early data concerning the Omicron variant came out of South Africa and was reportedly better than expected. Investors appeared focused on mega-cap stocks as the Dow Jones Industrial Average ($DJI) rallied more than 1.87%. The large-cap S&P 500 (SPX) was up 1.17% on Monday. The Nasdaq Composite GIDS closed 0.97% higher on the day. Bloomberg reported that data from South Africa revealed that the new Omicron variant may be more contagious but less severe. South African hospitals were seeing fewer patients needing breathing treatments than previous infections.  

This morning’s rally is being marked by a 12% drop in the VIX (Cboe Market Volatility Index). This move likely reflects how investors are receiving the Omicron news—fear and uncertainty appear to be waning. The VIX was below 24 before the open, and if it can break below 20 before the end of the week it could be a sign that Santa could deliver this Christmas.

The recent spike in the VIX shows how scared investors are of COVID-19 impacts and the power of the Fed’s words. Next week, the Fed meets again to discuss increasing the pace of the taper, which could also increase uncertainty. With that said, the bounce also shows how investors are anxious to get back into the market and invest. In my recent Investor Movement Index (IMX) Summary, I noted that TD Ameritrade clients were net buyers of equities in November, favoring sectors such as Information Technology, Communication Services, and Consumer Discretionary. The move to higher-volatility sectors helped push the IMX slightly higher to 8.82 (+7.30%) in November. TD Ameritrade clients were net buyers overall, increasing their holdings of both equities and fixed-income assets. While market volatility was elevated throughout the month, TD Ameritrade clients initially sold equities at the start of November but resumed buying as the month progressed.

In Omicron news, Vir Biotechnology VIR was rallying nearly 7% higher in premarket trading after a data release showed that its COVID-19 vaccine — a partnership with GlaxoSmithKline GSK —was effective against both the Delta and the Omicron variants. In yesterday’s trading session, the positive news on the Omicron variant appeared to be hitting some of the other vaccine stocks. Pfizer PFE traded 5.14% lower on Monday, while Moderna MRNA fell 13.49%. At the same time, S&P 500 component Norwegian Cruise Line NCLH rallied more than 12% on the news before retracing to close 9.51% higher. Its performance helped the Dow Jones Travel & Leisure Index ($DJUSCG) rise more than 4.3%.

Yesterday, information technology and communication stocks continued to lag the other sectors, energy and consumer staples led stocks higher. The price of oil (/CL) rallied off the $61.50 support level on Thursday, rising 5.69% and testing its 200-day moving average. Oil prices appear to be building on Monday’s gains because the commodity is trading another 3% higher before the open. The rally in oil helped the 10-year Treasury Index (TNX) bounce off a support level of 1.37% and closed higher at 1.43%. However, the 10-year yield is unchanged before Tuesday’s open. The 2s10s Treasury spread continues to flatten. The ratio was 1 at the end of November but is now reading near 0.75. The flattening of the yield curve is often seen as a warning sign to investors that the economy could be slowing.  

While tech was weaker yesterday, it’s coming out much stronger this morning. Intel INTC was up 7.77% in premarket trading on news that the company will take its Mobileye self-driving car unit public in 2022. Intel’s rally is adding about 30 points to the Dow Jones Industrial Average. Intel semiconductor competitor, Nvidia NVDA fell more than 2% on Monday but was rallying 3.87% before the market open. Finally, Apple AAPL is also rallying more than 2% before the opening bell as the company looks to set another all-time high.

Value Shopping

Investors appeared to be buying value stocks on Monday because the S&P 500 Pure Value Index ($SP500PV) rallied 1.62% compared to the S&P 500 Pure Growth Index ($SP500PG), which only rallied 0.05%. You may recall that value stocks are perceived to be trading for less than their intrinsic value or book value. Growth investing has been the predominant strategy in the last five years (see Chart of the Day). The growth index has returned more than 143% in that time frame, while the S&P 500 Index returned 104% and the value index just 34%.

However, over the last year, value stocks have made a push by exhibiting greater strength when compared to growth. While the battle has been back and forth, growth appears to be losing momentum to value stocks when comparing the two indices using the relative strength indicator. 

CHART OF THE DAY: VALUING THE UNDERDOG. The S&P 500 Pure Growth Index ($SP500PG—candlesticks) has outperformed the S&P 500 (SPX—blue), and the S&P 500 Pure Value Index ($SP500PV—pink) over the last five years. Comparing the growth index to the value index using relative strength (green line), growth showed greater strength until 2021. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Looking Forward: In a December 5, 2021 research report from Yardeni, forward price-to-earnings (P/E) ratios for S&P 500 growth stocks were listed at 29.5 and value stocks at 16.1. A forward P/E ratio looks at the expected earnings of a company and compares it to its current price. The Yardeni report, it looked at the consensus one-year forward earnings to make its calculations.

If investors continue to focus on value, then these numbers will likely change because value stock prices could rise at a faster pace, and growth stock prices may slow or fall. But there is no guarantee that will happen. Additionally, if projections change as expenses rise due to inflation, then the forward estimates could change too. This is one reason investors could be favoring value stocks; they tend to be more consistent in controlling expenses and growing earnings. 

When looking for value, investors may find certain areas to be better than others. Currently, 47.4% of the stocks in the S&P 500 have forward P/E ratios over 20 and 12.5% have forward P/E ratios under 10. The median forward P/E is 19.8. However, large caps appear to have a higher forward P/E ratio of 20.5, while mid-caps and small caps are at 15.7 and 14.4.  

Muggins: The PEG ratio compares a company’s P/E ratio to its growth rate, which makes it a tool for helping to determine a stock’s value. A PEG ratio of less than 1 is commonly considered to be undervalued. A ratio between 1 and 2 is fairly valued. And a ratio greater than 2 may be overvalued. Going back to the Yardeni report, the S&P 500 Citigroup growth and value stocks are seeing a bit of a spread. Value stocks have an average PEG ratio of 0.80, while growth stocks have an average PEG ratio of 1.29. Growth stocks aren’t bad, but if investors are looking for value, the current PEG ratio for value stocks is the lowest it has been going back to 1995. Of course, a low PEG ratio doesn’t guarantee a stock will be a value or that it will grow. It’s just another tool to help you in your analysis.

Trailing PEs: While the forward P/E ratio is helpful, earnings projections can change. The more traditional approach to P/E ratios is using the trailing 12 months of earnings. Currently, the trailing 12-month P/E ratio for the S&P 500 is 28.92. This is lower than last year, which was closer to 36, but historically, it’s still quite high according to Yale Professor Robert Shiller and author of Irrational Exuberance. In 2007, just before the credit crisis, the P/E for the S&P 500 was about 27. At the dot-com bubble, it was near 45. And it was at 30 before the Great Depression. In fact, a P/E on the S&P 500 of 20 was often used as a warning signal to investors that stocks were getting overvalued.

High P/E ratios are far more common today than the 1990s. Bear markets used to see P/E ratios fall below 10 before reaching a market bottom. However, the closest the S&P 500 has come to those levels was in 2009 when it dropped to 15 after the credit crisis. This may reflect a fundamental shift in how investors gauge stock valuations, or it may show how effective the Fed has been at combatting bear markets by pushing interest rates lower. 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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