Stocks rose Monday, as liquidity in corporations showed continued signs of life. Wall Street’s historical data shows a quick recovery after the recessions the country is likely in, while many do point out that the uncertainty of the coronavirus crisis could render those points useless.
All three major U.S indexes rose more than 3% Monday, with the S&P 50 up 3.35%.
Importantly, the price of crude oil fell more than 6%, as investors shuddered at the negative to demand posed by Trump’s comment that social distancing guidelines will last through April. That’s potentially a negative indication for stocks.
The 10-year treasury yield fell to 0.63%, potentially pointing to a risk off move from investors. But this certainly points to the rush of Federal Reserve capital into the treasury market, as the Fed tries to bring credit spreads down to create a lower cost of debt for companies and households.
At first, that wasn’t fully working. And while credit spreads still remain above 9% over the 10 year treasury, the price of corporate bonds are indeed moving up, signaling slightly higher confidence in corporate credit. That’s a positive for equities in the short-term while the virus rages on.
The iShares iBoxx Investment Grade Corporate Bond ETF is seeing its share price rise 1.05% Monday. The iShares iBoxx High Yield Corporate Bond ETF is up just 0.79% in price. The Fed has bought investment grade corporate bonds to support that market, but the high yield market — which some say may soon see inflows from the Fed — is more dependent on yield curve normalization, as the Fed buys safer treasuries.
Both of these assets have been seeing price gains in the past week or so, with Monday acting as confirmation that the Fed’s stimulus is working at least marginally.
For the slightly longer-term, Wall Street is having an economic debate: will there be a sharp “v-shaped” recovery after the virus passes, or will the economic fallout of the recession we’re likely in be too great, enabling a disappointing U-shaped recovery?
Stocks have been essentially flat since March 26, having both up-days and down days. A recession was priced into the market a few weeks ago. That’s less the case now, but the risk premium investors are demanding in stocks is still close to 6%, far above historical averages of 3%.
Here’s what Wall Street said:
Jason Pride, Chief Investment Officer, Private Wealth at Glenmede:
“A V-or U-shaped recovery? Typical downturns can be described or illustrated as a V-shape or a U-shape. V-shape downturns typically result from a short-term retrenchment in economic activity due to supply or demand disruptions, which can revert to the original output path quite rapidly. A U-shaped downturn is usually cause by a significant retrenchment in economic activity from overspending or over borrowing that results in longer-term, downturns and has the potential to create some measure of permanent impairment to the trend of economic and profit growth. All historic pandemic events in the past century have exhibited V-shaped downturn behavior.”
Lauren Goodwin, Economist, Multi-Asset Strategist, New York Life Investments:
"Our base case scenario is that we’ll see a U-shaped recovery beginning in Q3, even if Q3 data as a whole doesn’t show meaningful economic growth. If the virus impact lasts longer, then financial market outcomes could retrench further. In the meantime, Q1 2020 data will show only early effects of the COVID shutdown, and Q2 will demonstrate a severe economic contraction."
Kristina Hooper, Chief Global Market Strategist, Invesco:
"What is the US bond market telling us? The team believes the recent dislocation has opened opportunities for investors seeking attractive entry points in fixed income. While an economic recession seems almost assured at this point, bonds won’t suffer equally. Although dislocations are likely to persist for some time in the fixed income market, the worst is likely behind us in terms of liquidity fears now that the Fed has stepped in. We believe investors should consider adding to high quality fixed income to take advantage of above-average spreads and solid fundamentals.”
Positively, shares of Johnson & Johnson (JNJ) - Get Report rose 8% after the company said it may have human testing for a Coronavirus vaccine by September.
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