Stocks powered higher Tuesday, as retail sales data for May painted a rosy picture of the economic recovery. But that recovery is now threatened by health threats and high valuations, some on Wall Street point out.
All three major U.S. indices ended substantially higher Tuesday, with the S&P 500 up 1.9%. The 10-Year Treasury yield rose to 0.75%. Yields rise when prices fall.
Retail sales for May came in at 17.7% year-over-year, beating economists' expectations of 8%. This is confirmation that the economy is moving back towards growth in the second half of the year, which the market had priced in. The retail data also undermines the idea that the second quarter will be as disastrous as it was originally forecasted to be.
The data seems consistent with May job numbers of 2.5 million people, beating estimates of an 8 million loss. April saw massive jobs losses and a decline in retail sales.
Cyclical sectors, especially consumer-oriented ones, outperformed.
The S&P 500 Equal-Weight Consumer Discretionary index rose 2.48%. The VanEck Vectors Retail ETF (RTH) - Get Report rose 2.74%. Home (HD) - Get Report, a large component of the fund, rose 3.68%. Energy ETF (XLE) - Get Report rose 2.85%. Banking ETF (KBWB) - Get Report 2.25%, as the yield kept expanding.
But the retail data is backward-looking and investors have recently been concerned about an apparent second wave of virus infections, which may cause another round of lockdowns.
The 5-day moving average of daily new coronavirus cases in the U.S. is near 20,000, up from 17,000 a few weeks ago, according to data from Johns Hopkins. If a second wave gets out of hand, states will be forced to lockdown again, making that solid economic data less relevant.
Meanwhile, stock valuations are stretched and priced for the most optimistic of economic outcomes. The average forward earnings multiple on the S&P 500 is 25 times, which is reasonable compared to interest rates, by historical standards, for a healthy economic environment.
Here’s what Wall Street’s saying:
Kevin Nicholson, Co-Chief Investment Officer, Global Fixed-Income, Riverfront Investments:
"The economy appears to have bottomed due to monetary and fiscal stimulus, in our view. We believe achievement of full employment and price stability are in jeopardy. Yield curve control may be on the horizon. This can help provide a backstop to the stock market, in our view.”
Marc Odo, Portfolio Manager, Swan Global Investments:
"The attitude of many Americans seems to be that they are done with the coronavirus, but the coronavirus is not done with us. The large run up in the market was predicated upon everything going right and a return to normal in short order. However, the regional spikes in infections is challenging that optimism. The decrease in the rates of infections and deaths from COVID-19 represented winning a battle, not winning the war. World War II wasn't over after Midway and the Civil War wasn't over after Gettysburg. A long, hard slog lies ahead.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
"We want to add risk as the consolidation plays out. After the recent ramp to SPX 3200, we continue to expect the market to spend the next few weeks in consolidation mode and would add to the economic reopening sectors on weakness."