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Is Liquidity Shoring Up Markets Again? What Wall Street’s Saying

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Stocks rose considerably Thursday, with banks leading the way. Liquidity and stimulus have become a major theme in the past few days. 

All three major U.S. indices rose, with the S&P 500 up 1.15%. 

In the morning, the index was down 1.7%. Fears of a second wave of coronavirus infections potentially spurred by what could be premature state reopenings had taken hold. That would cause more closings and a prolonged economic recovery, which has largely not been what stocks have priced in. 

Banks lead the market turn-around. 

JPMorgan  (JPM) - Get JP Morgan Chase & Co. Report, Bank of America  (BAC) - Get Bank of America Corporation Report, Wells Fargo  (WFC) - Get Wells Fargo & Company Report and Citigroup  (C) - Get Citigroup Inc. Report combine for a market cap of $640 billion and they all rose between 3.6% and 6.7%. 

Banks underperformed in April, actually losing value, while most cyclical sectors gained substantially. Investors were weighing low interest rates — which usually compress banks’ net interest margins — against the prospect of higher loan volumes. Higher loan volumes would be consistent with the theme of a quick recovery, but the recent 3% drawdown n the S&P 500 since April 29, was indeed precede by bearishness on banks. 

But fresh data is showing the low rates are working like a charm, at least for now. 

Since May 11, there have been $732B in investment corporate grade bonds issued in the U.S. In 2019, there was $975 billion issued. And according to data from Canaccord Genuity Strategists, the issuance has been broad, across sectors. 

Plus, a new $3 trillion fiscal stimulus package include another batch of $1,200-plus payments from the government to households. The first round may have worked, as many consumer companies said on earnings calls that they were seeing less severe sales declines in April compared to in March.  

All of this positivity will be weighed against a potentially continued move up in virus cases, as states remain open. That would slow the economic recovery, which Federal Chairman Jerome Powell already said Wednesday is unlikely to be quick, regardless of the liquidity his operations are currently providing. 

Two small risk-off signals to the market Thursday: the small cap Russell 2000 index, sometimes more volatile than large caps, rose just 0.35% and the 10-year treasury yield fell marginally to 0.63%. 

Here’s what Wall Street’s saying: 

Don McCree, Head, Commercial Banking, Citizens Bank to TheStreet:

"We’re basically supporting our clients. There’s not a lot of new loan demand right now because people are hunkering down until things reopen. A couple different positive signs from our standpoint — we saw a lot of drawings of credit facilities — a lot of those are getting paid back. Companies are beginning to get their houses in order. Second thing that has happened: the bond markets are wide open. We’ve had two strait months of high yield issuance. That’s allowing companies to go source capital in the high yield markets. That’s very different than where we were 6 weeks ago.” 

Tony Dwyer, Chief Market Strategist, Canaccord Genuity: 

“There has been an incredible ramp in corporate credit new issuance since the Fed announcement that it was going to buy corporate bond ETFs. While it is too early to assess what the Fed is buying and how it is going to impact the market, just the prospect of the Fed buying corporate bonds has kept corporate credit flowing, which should help companies survive through the crisis.”

David Kostin, Top Strategist, Goldman Sachs:

"In our quarterly Beige Book publication, we gather anecdotal evidence of fundamental and thematic trends from the earnings transcripts of companies in the S&P 500. Uncertainty prevailed regarding the recovery path, although pockets of optimism existed. Heightened uncertainty caused a wave of earnings guidance suspensions. Most managers rejected a V-shaped recovery, but instead expected a more gradual comeback after 2Q. Some firms reported strength in certain business segments. Others used China’s recovery as a reference for the US, but many were wary to extrapolate. Selected examples: American Express  (AXP) - Get American Express Company Report, UPS UPS.” 

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