Stocks fell Monday, after negative comments on the economy from Treasury Secretary Steve Mnuchin.
All three major U.S. indices fell, with the S&P 500 falling as much as 1.2%. The 10 year treasury yield fell to 0.68%, only a mild move down. Mnuchin told television anchors Sunday that a failure to adequately reopen economies across the country could result in lasting economic damage.
Currently, small business are sopping up loans administered by the small business adminstration and trying to keep employees at work, but liquidity is a major issue, especially if funds don’t keep flowing in.
Meanwhile, stocks are at elevated levels. Most on Wall Street agree that with interest rates where they are, the average multiple on 2021 earnings on the S&P 500 should be roughly where it is — above 17 times. But that leaves the market vulnerable, as the multiple is usually a fair one on just the next year’s earnings, historically. Some are still worried a re-spike in coronavirus infections or another quarantine is in the cards.
The S&P 500 is hovering around 2,900 Monday, a mark that it fails to substantially surpass since March 23, the bear market low. When the index hits roughly 2,930, it comes back down. Some strategists point out the market meets some technical resistance at that level.
Another risk to stocks is reflation. In fact, “Near-term, we have to contend with deflationary forces of a recession, but we’re hearing more questions on the reflation/inflation playbook,” wrote Morgan Stanley Chief U.S. Equity Strategist Mike Wilson in a note. Monetary and fiscal stimulus, as noted by others as well, may set up for a considerable jump in inflation, especially once consumers, potentially strapped with cash, get out of the house.
This could cause a spike in bond yields, which would either take the wind out of the sales of the stock market, or, if the economy is still in more need of low rates, it could send stocks into a downward spiral.
Elsewhere, Disney (DIS) - Get Report shares fell 1.13% even after the company reopened parks in China and saw them sell out. Investors, for over a month, have been taking hints from around the globe that re-openings may work without reinfections, but Disney’s U.S. operations across its businesses remains a question and stock investors may be turning somewhat more skeptical on re-openings overall.