Stocks ended Tuesday with a significantly lower gain than they had in the afternoon. Wall Street is looking for a correction in stocks and one strategist recommends to long-term investors looking for opportunities to find yield while staying away from broad stock market exposure.
All three major U.S. indices ended the day higher, with the S&P 500 up 0.9%, compared to a gain at midday of almost 2%. The 10 year treasury yield rose to 0.65%, but it had risen to 0.67% at midday, as risk-on sentiment faded.
Investors, while buying stocks, have been piling into cash. Since February 24, cash holdings have risen 105% to $4.7 trillion, a sign that investors are wary of the current rally off of the March 23 low.
On the optimistic side of things, many are growing incrementally more optimistic on the consumer, which some strategists say are benefitting from fiscal and monetary stimulus. And the Institute for Supply Chain Management’s non-manufacturing index showed a reading of 41.8 for the month of April, a contraction year-over-year, but better than economist’s estimates of 40. Some services sectors in the index may be related to consumer spend and the better-than-feared results seems consistent with the theme that the consumer is moving in the right direction.
Companies like Starbucks (SBUX) - Get Starbucks Corporation Report, Chipotle (CMG) - Get Chipotle Mexican Grill Inc. Report, Shake Shack (SHAK) - Get Shake Shack Inc. Class A Report and Facebook (FB) - Get Meta Platforms Inc. Report have said on their earnings releases that they are seeing revenue gently turn back in the direction of 0% and positive growth year-over-year in the past few weeks.
Oil prices also rose 20% to $24.6 a barrel, key for oil companies and employment in the industry. Oil is up more than 90% in less than a week.
But with the fading sentiment throughout the day, some cyclical stocks outperformed the market, while others didn’t, as was the case with defensive stocks.
One strategist says credit spreads are wide, signifying both bearishness on the economy and that slightly safer-than-stocks corporate bonds are worth long-term investors’ money. He dissuades investors from piling into cash. High yield spreads are at above 7% over the 10 year treasury yield, very high compared to historical norms.
Some technical indicators also indicate a sell-off. Fundamentally, valuations are stretched as earnings estimates for 2020 have fallen, against risks that lockdowns won’t work well, the virus’ spread will tick up and more tariffs on China will be implemented.
Here’s what Wall Street is saying:
Press Relations, Drawbridge Strategies Research:
"Despite a 30 percent rally from March 23 lows, markets are teetering on very narrow support, says Drawbridge Strategies CIO Tim Fortier—who issued a Sell on the Nasdaq 100 today and may follow with a similar signal for the S&P 500 in the next few days. Tim’s Market Demand Indicator (MDI), which employs unique breadth measures to define market movements in advance, has successfully signaled major market turns as much as two weeks in advance—including the recent COVID-related market ups and downs…and ups.”
Mark Haefele, Chief Investment Officer, UBS Global Wealth Management:
"Alongside the swift bounce in equities from bear market lows, investors have also pushed funds into a very different asset—money markets. Cash on the sidelines has grown to around USD 4.7tn, leaping by more than USD 1tn in the space of eight weeks. But while rushing to the exits may feel like a safe choice for those uncomfortable with the rally or unresolved COVID-19 risks, we think there are several better alternatives to cash: Go for credit over cash. We currently see compelling opportunities in credit, which appears closer to pricing in our downside scenario than equities, where there appears to be less margin for error. Some of the more interesting assets include US high yield credit, US investment grade credit.”
Jen Redding, Wedbush Securities, Senior Retail Analyst:
"Early signs show pent-up demand driving off-price post- COVID-19. in states reopening retail, early search indicators show Off-Price is off to a strong start. Indeed, we are confident that the Off-Price retailers will emerge as retail’s winners in the post-COVID-19 era. As worldwide economies recover from the recessions and consumers cut budgets on discretionary spending, they traditionally turn towards discount stores. As disruptions in retail supply chains shake the majority of retailers, we’re confident Off-Price are long into executing on strategies designed to take advantage of surplus inventories and capitalize on the disturbances.”