Stocks Rose Friday, But So Did Bonds: What Wall Street’s Saying

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Stocks ended the week down, although they rose Friday. As valuations stretch, investors move into safe bonds and many on Wall Street caution against too much market exposure. 

All three major U.S. indices rose Friday, with the S&P 500 up 1.3%. Bt highlighting some semblance of pessimism in the market was the S&P 500’s fall of 1% for the entire week and the rise in the 10 year treasury bond prices, sending the yield down to 0.59% Friday. It entered Friday at 0.61% and entered the week at 0.64%. 

After reports that Gilead  (GILD) - Get Gilead Sciences, Inc. (GILD) Report Science’s remdesivir Coronavirus vaccine was a flop on the human testing stage, the company said it is too early in the process to deem the vaccine a failed one. Gilled shares rose 2.39%. 

Negatively, President Trump said lockdowns may last longer than previously anticipated. Stocks didn’t seem to react negatively to that. 

Congress passed the $480 billion fiscal spending bill that includes over $300 billion in small business relief. Some are worried that amount isn’t enough to keep businesses liquid and open, as seen by the rapid burn through of the first batch of money. Still, many investors are pleased with the government’s swift and seamless action, which can limit the damage done to the economy from Coronavirus. 

The 28% up move in stocks has been driven by monetary and fiscal stimulus, among other factors, although the market had anticipated the second round of fiscal stimulus. 

American Express  (AXP) - Get American Express Company Report beat earnings estimates and reported revenue in line with expectations at $10.3 billion. But the company set aside $2.6 billion as reserves to absorb expected credit losses, an indication that the consumer isn’t exactly getting stronger for the near-term. 

That’s another outcome the market has already looked past, as optimism that lockdowns will end soon prevails. 

The average stock on the S&P 500 trades at 20 times 2020 earnings estimates, which have now fallen 24% year-to-date. And stocks are trading at 16.5 times analyst estimates of 2021 earnings, usually a reasonable multiple on the next 12 months of earnings, not 24. 

Here’s what Wall Street is saying: 

Scott Knapp, Chief Market Strategist, CUNA Mutual Group:

“As we begin to slowly turn some of our attention away from the public health crisis, the economy is still looming in our peripheral vision, and we’ve only just begun to wrap our heads around the size and scale of the damage done there. The most recent trend in 10-year treasury security yields are also echoing relative pessimism here – yields this week are nearly 50% lower than they were at the close of February, and are still hovering within a few basis points of the lows reached at the peak of investor panic in mid-March, which tells us that risk aversion and skepticism about near-term economic growth is still very much prevalent right now."

Lori Calvasina, Head, U.S. Equity Strategy, RBC Capital Markets

“2020 EPS forecasts on the sell-side have finally been ratcheted down sharply. It’s possible, though far from clear, that they’ve been cut enough. (2) This doesn’t mean that US equity markets are out of the woods, as 2021 EPS growth forecasts still seem too aggressive and in need of downward adjustments. Our own 2021 EPS forecast, which bakes in a healthy economic recovery and margin expansion is $153. Buy-side EPS expectations for 2021 are $158, on average, based on our recent investor survey. (3) In recent earnings calls, several companies have alluded to the idea that the economic recovery will be slow or uneven, and that it may take considerable time for the US economy to get back to pre-coronavirus levels.” 

David Miller, Chief Investment Officer, Catalyst Capital Advisors 

"Stocks seem far too expensive at least compared to [corporate] bonds right now. In equities, you want to be in equities where they’re not being affected by this [Coronavirus]. We’re pretty much fully allocated.” Miller says his funds hold Dollar Tree  (DLTR) - Get Dollar Tree, Inc. Report, mostly a defensive consumer staples company. 

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