Wall Street is betting big on Main Street

BMO Capital Markets' Brian Belski offers his buying strategy in a market seizing on vaccine optimism. Plus, GoodRx CEO Doug Hirsch on the startup's new competition from Amazon Pharmacy. And Hedgeye Risk Management's Darius Dale is back with his firm's contrarian view of the market.

Posted: Nov 19, 2020 5:50 PM
Updated: Nov 19, 2020 5:50 PM

Coronavirus vaccines are finally in sight -- and investors are celebrating by scooping up the tiny stocks most likely to benefit from the eventual reopening of the US economy.

The vaccine breakthroughs announced this month by Pfizer and Moderna set off a fierce rotation on Wall Street away from Big Tech and stay-at-home winners like Zoom, Teladoc and Netflix.

Instead, investors are plowing money into the Russell 2000, an index of small-cap stocks whose values are largely linked to the whims of the US economy. The Russell 2000 has spiked 15% so far this month alone.

If it holds, it would be the index's best monthly gain since 2011 and just shy of its best month since its 1984 launch.

"This move is incredible," said Ryan Detrick, chief market strategist at LPL Financial. "There is a rush to small caps because they are huge beneficiaries of the economy coming back online next year."

Not only is the Russell 2000 on the verge of a record-breaking month, but the index also set an all-time high last week. That's significant because, unlike the flurry of records set recently by the S&P 500, this was the Russell's first record high since 2018. That suggests there could be more room to run.

"Small-caps literally didn't go anywhere for two years," Detrick said. "They were left in the dust. Now they are the ultimate catch-up trade."

Normally, it takes four or five years for small caps to hit all-time highs after a recession, according to Nicholas Colas, co-founder of DataTrek Research. This time, it took just eight months.

"Hope is absolutely a driver of cyclical stock valuations and returns," Colas wrote in a note to clients Wednesday. "Traditionally, these hopes recede when the Fed starts to raise rates. We know that won't be happening any time soon."

'Light at the end of the tunnel'

The rotation into small-cap stocks has driven up valuations of these companies. As of Wednesday, the Russell 2000 traded at 31 times forward earnings, according to Refinitiv. That's well above the 10-year average multiple of 23.

Strategists at UBS Wealth Management told clients this week that smaller stocks are likely to outperform larger ones next year.

"If investing in 2020 was about going resilient, large and American, we think 2021 will be about going cyclical, small and global as the sectors and markets heavily affected by lockdowns start to revive," the strategists wrote.

Of course, the small-cap gains come at a time of heightened worries about the pandemic. Covid-19 infections are skyrocketing, and hospitalizations around the country are rising sharply.

New York City public schools are shutting down again. Within weeks, the city's indoor dining and gyms could be closed as well. United Airlines warned Thursday of an uptick in cancellations and deceleration in bookings because of the intensifying pandemic.

Pandemic fears have resurfaced on Wall Street too, with the S&P 500 on track for its third straight day of declines.

"The vaccine is the light at the end of the tunnel," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "But we're still in the darkest part of the tunnel."

Sonders warned that if the economic recovery is pushed further into the future, investors could rush out of small-caps and back into the stay-at-home winners.

Less room for error

Unlike the S&P 500 and the Dow, which are home to multinationals such as Nike, General Electric and Apple, the Russell 2000 is more of a pure play on the US economy.

The median market valuation in the fund is just $660 million. Its biggest constituents include Penn National Gaming, Sunrun, Deckers Outdoor and Caesars Entertainment -- none of which are worth more than $14 billion.

These small-cap stocks were crushed during the height of the pandemic because unlike their larger peers, they have less margin for error. Their balance sheets tend to have less cash and more debt, so when business dries up during a recession, financial trouble follows.

At the end of October, a staggering 48% of the companies in the Russell 2000 were unprofitable, according to Schwab's Sonders.

"There is a view that maybe that is the worst we're going to get," Sonders said, adding that the last time there was a peak in unprofitability, the index surged.

Small-cap stocks are also benefiting from the Federal Reserve's extremely aggressive pandemic response. By cutting interest rates to zero and buying corporate debt, including junk bonds, the Fed successfully unlocked frozen credit markets last spring.

That's huge for small-cap stocks because a large percentage of them are considered "zombie companies," Sonders said, meaning they don't earn enough money to even pay interest on debt.

So if credit markets froze again, perhaps due to the worsening pandemic and Washington's failure to provide more stimulus, small-cap stocks could fall sharply.

Market bulls are clearly betting that won't happen.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 515504

Reported Deaths: 10296
CountyCasesDeaths
Harrison34999558
DeSoto33360432
Hinds32743643
Jackson24906392
Rankin22565405
Lee16455245
Madison14954283
Jones14158248
Forrest13834260
Lauderdale12311323
Lowndes11357193
Lamar10693140
Pearl River9748244
Lafayette8868143
Hancock7849132
Washington7559169
Oktibbeha7229138
Monroe7068179
Pontotoc7033110
Warren6885178
Panola6791135
Neshoba6744210
Marshall6707142
Bolivar6468151
Union643598
Pike5942157
Alcorn5921107
Lincoln5540136
George510680
Prentiss508285
Tippah495683
Itawamba4884107
Scott478999
Tate4777117
Adams4776125
Leflore4749144
Copiah458195
Yazoo458092
Simpson4566117
Wayne443472
Covington434895
Sunflower4319106
Marion4295112
Coahoma4244110
Leake414191
Newton396182
Tishomingo386894
Grenada3789109
Stone366166
Jasper341266
Attala340490
Chickasaw318367
Winston318392
Clay312978
Clarke301695
Calhoun286850
Holmes272889
Smith270552
Yalobusha244947
Tallahatchie232353
Greene225149
Walthall222166
Lawrence220242
Perry214556
Amite210357
Webster206548
Noxubee188843
Montgomery182157
Carroll175441
Jefferson Davis174343
Tunica163539
Benton153139
Kemper145441
Choctaw137027
Claiborne134839
Humphreys132239
Franklin126530
Quitman107828
Wilkinson106139
Jefferson97134
Sharkey65321
Issaquena1957
Unassigned00

Alabama Coronavirus Cases

Cases: 847659

Reported Deaths: 16172
CountyCasesDeaths
Jefferson1163752005
Mobile743371381
Madison53434738
Shelby38413371
Baldwin38171589
Tuscaloosa36131643
Montgomery34571782
Lee25664264
Calhoun22622519
Morgan22527408
Etowah20059520
Marshall18821318
Houston17769426
St. Clair16946359
Limestone16192220
Cullman16140305
Elmore15948295
Lauderdale15055307
Talladega14244302
DeKalb13061271
Walker12138380
Blount10765193
Autauga10545157
Jackson10204195
Coffee9435192
Colbert9363210
Dale9038192
Tallapoosa7283202
Russell710165
Chilton7078170
Covington6967197
Escambia6962144
Franklin6364108
Chambers5795142
Marion5435130
Dallas5302210
Pike5128109
Clarke485686
Lawrence4845130
Winston4785110
Geneva4650136
Bibb435495
Barbour370180
Butler3444101
Marengo342793
Monroe338366
Randolph337767
Pickens334790
Fayette331485
Henry321066
Cherokee319964
Hale318889
Crenshaw261678
Washington256852
Cleburne255460
Lamar253555
Clay252069
Macon245767
Conecuh193562
Coosa185847
Wilcox178338
Lowndes178268
Bullock152745
Perry141840
Sumter139741
Greene130345
Choctaw94328
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