Stocks fell Friday, after President Trump wielded a threat of added tariffs on China for its handling of the Coronavirus pandemic. Wall Street continues to be cautious.
All three major U.S. indices fell Friday, with the S&P 500 down 2.8%. The 10 year treasury slipped marginally to 0.63% from 0.64%. Yields fall when prices rise.
But the risk-off move of late has shown less of a move into treasuries, as prices there have risen along with a liquidity-driven up market since March 23. Global investors poured $90 billion into cash this week, compared to $10.6 billion into bonds, according to Bank of America Global Research.
What sent the market into a tizzy friday was President Trump’s threat of added tariffs on China as retaliation for what he thinks was a poor job on containing the Coronavirus pandemic.
The Institute for Supply Chain Management also said Friday that the PMI, or Purchasing Managers Index showed an April reading of 41.5. Any reading below 50 represents a year-over-year contraction in activity. Investors have already foreseen poor economic data and are now pricing stocks for a relatively quick economic recovery.
But valuations are stretching well past historical averages, with grave economic risks still on the table. One strategist pointed out that credit markets haven’t rebounded with strength equity markets have, another negative indicator for the economy and stocks, with credit spreads at 700 basis points. That’s 7% higher on bond yields of risky debt, compared with the 10 year treasury yield. for a healthy environment, that spread sits below 4%.
Many on Wall Street advocate for owning recession-resistant growth stocks. Amazon (AMZN) - Get Report is somewhat in that category and Thursday, its earnings showed a revenue beat of expectations but profit miss. The company has gone back into investment mode, pressuring 2020 profits, as it ramps up capabilities for an accelerating e-commerce trend, especially in groceries and essentials. The stock fell 7.6% Friday after a huge run-up in April.
Many also advocate consumer staples, some of which see a tailwind from the outbreak. Clorox (CLX) - Get Report beat earnings and revenue estimates Friday morning and the stock rose 3.4%. Clorox is now trading at 28 times forward earnings, but its short-term outlook boasts stellar sales and earnings growth rates, a huge positive if the market is willing to accept this valuation.
Here what Wall Street’s saying:
Binay Chandgothia, Managing Director & Portfolio Manager, Principal Global Asset Allocation, Principal Global Investors:
A 12.4-point drop in the U.S. PMI is an absolute outlier for a single month. Even during the GFC, it dropped by a max of 5.9 points from September 2008 (44.8) to October 2008 (38.9). However, we’ve seen similar data across global markets over the last few weeks, so there is little shock value in today’s numbers. The markets have already moved beyond analyzing the anticipated immediate collapse in economic activity to focusing on the duration of it. While there are some initial signs of stabilization in indicators that have already dropped precipitously, the markets would like to see continued progress – moving from a stabilization phase to a recovery phase.”
Mark Haefele, Chief Investment Officer, UBS Global Wealth Management:
"We expect stocks to remain volatile as investors evaluate fast-moving news on the course of the pandemic, the gradual lifting of lockdowns, data on potential treatments and vaccines, and economic releases. The continued swift rise in jobless claims in the US underlines the scale of the challenge faced by policymakers. We will be looking for evidence that emergency policy support is reaching its targets, preventing a surge of unemployment and bankruptcies from turning a hiatus in activity into a more lasting economic malaise. given the uncertainty that still exists about whether or not we see a second wave triggering renewed lockdowns, we continue to favor selective equity strategies that are either well positioned to gain from further upside or positioned to limit the downside in the event of a relapse in the COVID-19 pandemic. As such, we favor select cyclical stocks that would outperform in an upside scenario; stable and defensive stocks, such as non-discretionary consumer stocks, that might perform more strongly in our central scenario; or companies that stand to benefit from longterm trends that are likely to be accelerated by COVID-19, including e-commerce.”
Tony Dwyer, Chief Market Strategist, Canaccord Geniuty:
"The credit markets continue to reinforce a longer road to recovery than equity investors expect. The equity market appears to be hoping for a sharp “V” shaped recovery on Fed liquidity measures that have supported corporate credit. The US Treasuries, bank lending, and financial conditions suggest that while the economy can likely avoid further free-fall, the recovery is likely to take longer than the equity market believes. In my view, this remains a time to not guess."