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The reversal of losers turning to winners was the most extreme seen in at least 5 decades.

The Catalyst: a COVID-19 Vaccine

Early Monday morning pharmaceutical giant Pfizer (PFE) disclosed results from a trial of its COVID-19 vaccine indicating a 90% effectiveness. This is fantastic news for the world!

Market’s Reaction

The reaction in the stock market was extreme with investors now anticipating a quicker economic recovery that could benefit some of the most beaten up companies such as airlines and cruise lines. Simultaneously, the year’s best performing “stay at home” stocks, many in the technology sector, dropped in price as investors expect a possible slowdown in their momentum.

Monday’s Performance Highlights

Digging Deeper into History

When digging deeper into market performance history dating back more than 5 decades,we see further data on Monday’sunprecedented performance. To illustrated this, I have separated the 500 stocks in the S&P 500 into two groups as follows:

  • Top 50 – these are the 50 stocks, of the 500 in the S&P 500, that have performed the BEST over the prior 12 months
  • Bottom 50 – these are the 50 stocks that have performed the WORST over the prior 12 months

As you can see in the below graph, the Top 50 were down an average of -4.2% on Monday while the Bottom 50 surged an average of +19.5%. This difference of nearly 24% has never been seen in our data dating back to 1963! This analysis makes clear that the rally on Monday was entirely different than what has been normal in 2020 as the leaders in Monday’s market were not the stocks that have been leading throughout the year.

Top 50 vs bottom 50

The surge higher in price of the Bottom 50 stocks, again, those stocks that have had the worst performance during the past 12 months, is not entirely unusual. Since 1963 we have seen the Bottom 50 surge 10% or more 31 times or about 1 in every 500 trading days. It’s certainly not frequent but what made Monday meaningfully different is that the Top 50 usually rally higher at the same time, up 27 of these 31 days.

The question is always “what’s next?” Of course there is no way to know but it is unlikely that we see performance as extreme as we did on Monday. Long-term investment success will continue to come from staying diversified and staying the course.

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