It has been a roller coaster year for global stock markets thanks to a combination of international lockdowns, travel restrictions and changes to the way we go about our daily lives. The technology and clean energy sectors stood out as strong performers but momentum stocks have intrigued investors. Which momentum stocks look set to continue their growth in 2020?
The coronavirus pandemic generated some major tailwinds for companies working in the stay-at-home investing theme earlier this year, pushing equities to dizzying heights in September.
Online retailer Overstock’s [OSTK] share price, for instance, climbed 789.6% between the start of the year and 4 December. At its 52-week high of $128.50, reached in August, shares in the company were up an astronomical 1,722% for the year-to-date.
Overstock's YTD increase to 52-week high
Zoom’s [ZM] share price also accelerated after becoming a favourite among momentum investors. The stock peaked at an all-time high of $588.84 in October, which marked a year-to-date rise of 765.4%. Zoom’s share price was up 502.6% year to date (as of 4 December).
The iShares Edge MSCI USA Momentum Factor ETF [MTUM], which gives an indication of how momentum stocks are performing, has outpaced the broader market so far this year. The fund was up 26.4% for the year-to-date (through 4 December), compared to the S&P 500’s 14.5% climb.
Looking at the fund’s portfolio, as of 2 December, its top holdings are in stocks such as Tesla [TSLA], Apple [AAPL], Amazon [AMZN], Microsoft [MSFT] and Nvidia [NVDA]. Tech makes up the biggest portion of the fund at 30%, with healthcare accounting for 28% and communication services 12%.
A shift to cyclical
The businesses that were worst hit during the initial months of the pandemic, such as the airline, hotel, restaurant and retail sectors, have been underperformers for most of the year.
However, increasingly positive vaccine news has been ushering investors back into these sectors on the basis that a global recovery will continue to lift these areas of the market in 2021.
As a result, the likes of Zoom and Peloton [PTON] have been retreating. The video conferencing platform saw its share price fall 11% on 10 November, following the announcement of the first vaccine breakthrough from Pfizer [PFE] and BioNTech [BNTX]. Meanwhile, Peloton’s share price dropped 20.2% on the same day.
On the other hand, shares in Delta Air Lines [DAL] saw some lift, as did Pfizer’s share price, which has gained 9.9% since it announced its vaccine’s 90% efficacy rate (through 4 December).
Will investors continue to see more rotation out of the tech, ecommerce and work-from-home stocks? Will those industries most affected by the pandemic be the new momentum stocks going forward?
Some financial experts fear that this sudden swing could be an overreaction. Investors are working on the assumption that a vaccine will be rolled out without any problems, economies will be able to open and life will immediately return to its pre-pandemic “normal”.
Nigel Green, CEO and founder of deVere Group, warns that the recent rotation out of growth and momentum stocks into other verticals (airlines, cruise lines, pharmaceuticals) could catch investors off guard.
“COVID-19 has fast-tracked the growing trend that existed before the pandemic in numerous ways, towards consumer convenience, for 24/7 access, and on-demand,” Green writes in The Street. “As such, disposing of stocks that support these key shifts in society and the economy in favour of so-called recovery stocks could well catch investors out.”
"COVID-19 has fast-tracked the growing trend that existed before the pandemic in numerous ways, towards consumer convenience, for 24/7 access, and on-demand" - Nigel Green, deVere Group CEO and founder
Green also highlighted how the global roll-out of a vaccine will take some time, especially given the logistical challenges it presents. In the near-term, at the very least, there is likely to be a high concentration of people working at home and staying indoors who will rely on online services and ecommerce, especially in the run up to the festive period.
Momentum stocks set for end of year push?
The November rally was driven by positive vaccine news as well as Joe Biden’s success in the 2020 US presidential election, which pushed the S&P 500 up 10.7% through the month. According to Sam Stovall, chief investment strategist at CFRA, the strength of the rally may mean a weaker seasonal rally in December.
“If [the S&P 500] is up more than 10%, it will only be the third time since World War II that November has been up that much. Such a strong November has a tendency to steal from Santa,” he told CNBC, adding that the average S&P 500 gain over the past several decades has been 1.5%.
"Such a strong November has a tendency to steal from Santa" - Sam Stovall, cheif investment strategist at CFRA
Stovall still expects the market to push on to new peaks, however, it will possibly be led by investors pouring back into the oversold tech and work-from-home stocks.
Nonetheless, Richard Sias, chair of the finance department at the University of Arizona, believes investors shouldn’t be making big moves at this time of year. They should be using the festive period as a chance to evaluate their holdings in momentum stocks, Mark Hubert writes in MarketWatch.
Sias suggests that investors need to consider trimming positions, with an eye on early 2021. According to Hubert, this is “in order to avoid the embarrassment of having to show, in their year-end reports to clients, that they had invested in losing stocks”. He also notes that momentum stocks often experience a case of the January blues.
“[T]he artificial pressures that were depressing losing stocks and boosting winning stocks will be removed — and these stocks will tend to revert to where they had been previously,” Hubert considers. “This, in turn, suggests that if you’re inclined to jump in and out of momentum strategies according to these seasonal tendencies, you should get out before the end of the year.”