Santa Appears to Favor Large-Cap Growth Stocks Over Value Stocks

Stock equity futures are pointing to a higher open as investors look to keep the Santa Claus rally rolling. Investors appear to be little affected by rising cases of the COVID-19 Delta and Omicron variants. Airline stocks rallied back on Monday despite the negative news and many leisure stocks were positive. Yesterday, investors appeared to be most interested in large-cap growth stocks, so we’ll see if investors look to diversify.

Like I said on Monday, the time between Christmas and New Year's are lighter volume days so be careful because they can turn quickly. Smaller position sizes and short-term opportunities may be more sensible approaches this week.

According to the Centers for Disease Control and Prevention (CDC), the majority of cases, 96.7%, are still Delta variants. Omicron makes up about 2.9% of cases, but last week it was only 0.4%, which is more than a 600% increase. The CDC has also shortened the recommended COVID-19 isolation and quarantine time from 10 days to 5 days. However, investors seem unconcerned with any of the changes as the S&P 500 futures (/ES) are rallying for the fifth day in a row and creating another all-time high before the opening bell.

Santa Claus delivered on Monday as stocks kicked off the Santa Claus rally by rising 1.38% on the S&P 500 (SPX), which closed at a new all-time high. According to CNBC, this is the strongest start to the Santa Claus rally in 20 years. The Dow Jones Industrial Average ($DJI) rose 0.98% and is about half a percent off its all-time high. The Nasdaq Composite GIDS rose 1.39% and is about one and a half percent off its high. Each index saw buying right into the close, which many traders often see as a sign that buying could continue into the next day.

Despite the major indices all closing higher, the buying wasn’t especially broad in that the NYSE advancers outnumbered decliners by about 2 to 1. Investor fear appears to have subsided some as the Cboe Market Volatility Index (VIX) fell 1.56% and is now below the 18 level.

Santa seemed to favor large-cap stocks as the Russell 1000 (RUI) rose 1.30% compared to the Russell 2000 (RUT) small-cap index that climbed just 0.89%. Growth stocks found themselves on the nice list with the S&P 5000 Pure Growth Index ($SP500PG) climbing 1.99% while the S&P 500 Pure Value Index ($SP500PV) rose just 0.97%.  

Each sector appeared on the nice list too, with all of them finishing the day in the green. Energy, technology, and real estate were the top three. Energy stocks rallied as crude oil (/CL) rallied 2.89% and is testing resistance around the $75 level. On Tuesday morning, oil is trying to leave that resistance level behind as it rallied another 1.31% in premarket trading. Despite the rise in oil, the 10-year Treasury yield (TNX) was slightly lower on the day for Monday and is just 0.07% higher in premarket trading on Tuesday.

Airline stocks traded lower on the news that over 2,000 U.S. flight cancellations have taken place since Christmas Eve due to airline workers calling in sick due to Omicron. The effects differed from airline to airline, with some having few cancellations while others reported up to 10% cancellations. However, the AMEX Airline Index (XAL) was only 0.75% lower. In fact, many airlines started the day much lower but found buyers to help them significantly trim their losses. The Dow Jones U.S. Travel & Leisure Index ($DJUSCG) actually closed 0.23% higher on Monday and added to its 5-day win streak.

Big Growth

When investors appear to focus on large-cap growth, the natural reaction may be to check out the old favorites. Meta FB had the biggest day of the popular large-cap growth stocks rising 3.26%. Apple AAPL and Microsoft MSFT grew 2.30% and 2.32% respectively. Apple closed at a new all-time high and is closer to reaching a $3 trillion market cap. The “magic” number is $182.86 and Apple is trading below $181. Alphabet GOOGL is trading near its highs too, but it only climbed about 0.67% on the day. Netflix NFLX is also trading well off of its highs and fell 0.16% on Monday. Amazon AMZN broke from the group by trading 0.82% lower and is nearing its 2021 starting price.  

Value stocks have made their move in recent months because investors are increasingly concerned about stock valuations. It’s important to remember that the driving force behind value investing is the prospect of rising interest rates. While it’s likely that interest rates will rise in 2022, as of today, the Fed has not made any rate hikes and has not announced any definite rate hikes in the immediate future.

Of course, the money markets have driven longer yields higher, which are affecting valuation. But Fed Chair Jerome Powell said that the Fed would target a federal funds rate of 0.90%. We can get some context by spot-checking a little history. In 2019 the average rate was 2.16%. In 2000 the average rate was 6.24%. Going clear back to the early ’80s, it was above 20%. The historical rate from the 50s to today averages about 5%. With that perspective, there could still be room for growth stocks with rising interest rates. 

CHART OF THE DAY: LARGE-CAP COMPS. Alphabet (GOOGL—yellow) has been the best performer over the last year compared to some of the most popular large-cap growth stocks. It has returned 66.75%. Microsoft (MSFT—blue) has grown 52.23%. Apple (AAPL—pink) 31.93%. Meta (FB—candlesticks) 24.97%. Netflix (NFLX—green) 18.11%. Finally, Amazon (AMZN—gray) 3.33%.Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Super Powered: Fear of the Omicron variant didn’t seem to stop moviegoers from going to see Spider-Man: No Way Home over the holiday weekend. The movie was a partnership with Disney’s DIS Marvel and Sony SONY. In its opening weekend, Spider-Man recorded $260 million in the United States, making it the second-largest domestic debut of all time according to the Hollywood Reporter. Globally the movie recorded $600.8 million, putting it third overall. This is a pretty phenomenal achievement considering many European countries have locked down, keeping people from seeing the movie.

Tesla is Electric: As CEO Elon Musk wraps up his stock selling, Tesla TSLA has started to rebound. The stock has rallied more than 21% in the last four days and is trading 1.8% higher in premarket trading. Daniel Ives of Wedbush noted in Bloomberg that Tesla has the potential to rise 30% next year because of the rising demand in China.

When investors are buying Tesla, it can be seen by some analysts as a sign of investor confidence because it has become a quintessential growth story. Tesla has a very high valuation trading at 304 times trailing earnings, but investors are willing to look past valuations when they’re more confident in the future of a company and the economy. 

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

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