Comments on How the Virus Relief/Recovery Trade Is Unfolding

Comments on How the Virus Relief/Recovery Trade Is Unfolding

Comments on How the Virus Relief/Recovery Trade Is Unfolding

Comments on How the Virus Relief/Recovery Trade Is Unfolding


We continue to see interesting behavior in the small-to-midcap segment of the U.S. equity market.

While the narrative seems to be that the reopening trade is driving more economically-sensitive small-cap, value, and cyclical stocks to outperform, the truth is of course more nuanced. By examining the relative style and size performance within the Russell 2500 Index, we can see how the virus relief/recovery trade is unfolding.

Chart Transparent
  • While the work-at-home play led to ongoing Growth outperformance through mid-July, the market then fell into more level relative style and size performance until the early vaccine test results were announced just after the election (November 9th, to be exact).
  • While this caused a quick and severe rotation into value, that rotation proved short-lived.  The more meaningful and enduring result was greater speculative behavior, evidenced by the steady outperformance of the Russell 2000 Index (red line). This trend of small-cap outperformance persisted for 3 months, through February 9th.
  • After close on 2/9, we see the sharp value rotation. The Russell 2500 Value (yellow line) would outperform the Russell 2500 Growth (orange line) by 18% during the ensuing month. During this period, small cap outperformance abated, and the Russell 2000 traded roughly in line with the Russell 2500 Index.
  • From close 3/8 through close 4/26, the Value rotation paused and in fact slightly reversed. The Russell 2500 Growth outperformed the Russell 2500 Value by about 5% during this period, and the Russell 2000 underperformed by almost 3%.
  • From close 4/26 through close 5/10, Value stocks recorded another 10% edge relative to Growth; however, small-caps slightly underperformed.

Arguably, then, there’ve been two recovery trades since the vaccine test results were announced:

  1. An early, more speculative phase dominated by smaller, more volatile stocks.
  2. A second, economic data-driven phase of Value stock outperformance (which has resumed after a consolidation period).


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