This article was written exclusively for Investing.com
On Monday about Pfizer's (NYSE 🙂 new COVID-19 vaccine followed a vicious circle. Investors started ditching all those technology names that have benefited from home trading when traditional physical stocks struggled. The news about the vaccine may indicate a change in the market trend as investors look to the future.
Since the market is a forward-looking discounting mechanism, it is essential to start thinking about the world within 6 to 9 months, especially when the vaccine is really around the corner. Especially if it turns out to be as effective as Pfizer's data showed. An improving economy could help interest rates rise on the long side of the curve. It could even push up the banks and other cyclical sectors as the money starts to move away from some of the technology stocks that have risen.
Higher Yields, Wider Spreads
While it may only be a short-term trend, Treasury revenues have started to increase. Currently trading around 90 basis points, up from around 50 basis points in mid-summer, a significant jump. While still low from a year ago, 10-year and Treasuries have been at their greatest since early 2018. spreads predict an improving outlook for the economy as a whole. This could cause a rotation in these financial stocks such as JPMorgan (NYSE :), Bank of America (NYSE 🙂 and Citigroup (NYSE :). It can also help some credit card stocks outperform, such as Capital One (NYSE 🙂 or American Express (NYSE :).
This shift and change in the bond market and its dispersion could signal that better economic growth can return, signaling the end of home trade. If the bond market sees a return to growth, investors may choose to sell some of those technology stocks that we've grown so fond of.
Buy-The-Dip Crowd
Perhaps more worryingly, the "buy the dip" crowd is finding out that a pullback isn't a dip, but the beginning of a new trend lower. Should an actual rotary trading take place, investors might find that the money left behind by some of the high-flying, stay-at-home names does not return, but instead remains invested in the reopening stocks.
Of course we've seen this show before. With the market flip-flopping, jumping heavily in the reopening stocks and then back in the tech sector several times in recent months. The question is, will it be different this time?
It could turn out that this is the time – with the prospects for a vaccine and better therapies. So in the next 6 to 9 months, there may finally be an economic recovery leading to higher yields. While this would help lift some of the financial stocks and cyclical names, it would also likely spell the end of the overvalued technology sectors running higher.
