Stocks raced higher Wednesday on hopes of a coronavirus vaccine. A rough GDP report coupled with confirmation from the Federal Reserve that it will keep stimulus flowing were expected outcomes.
Wall Street is growing more cautious on stocks by the day.
All three major U.S. indices rose Wednesday, with the S&P 500 up 2.66%. The 10 year treasury yield fell marginally to 0.61%, as the Federal Reserve continues buying the bond, as most market action was quite. risk-on.
Gilead Sciences (GILD) - Get Report said its testing of its Coronavirus vaccine Remdesivir has been yielding positive results, an indication that normal life can resume when the vaccine hits the market and a sentiment booster for stock investors. Gilead rose 5.67%.
GDP for the first quarter was negative 4.8%, but only encompassed less than a month of lockdowns. Most see Q2 GDP as contracting violently, but these outcomes are well known by investors at this point.
The Federal Reserve made it clear that it will keep its benchmark lending rate at between 0% and 0.25% and that it will maintain its broader stimulus program aimed at getting cash into the banking system and keeping rates across the bond market low. This was another outcome the market expected.
But with the equity risk premium — or the excess rate of return expected on stocks compared with the rate of return expected in the safe 10 year treasury bond — at 3.9%, some are getting cautious. The lower the premium, the less attractive stocks are. The risk premium historically sits at around 3.5% and reached 7% in March when markets priced in a recession.
Here’s what Wall Street is saying:
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance:
"The awful headline number of -4.8% GDP is even worse when you consider that the first two months of the first quarter were relatively normal and this number only includes the March lockdowns. Given that the full lockdowns continued through April and most states are likely to continue at least partial lockdowns through May, that leaves June as the only month in the second quarter that may see a possible return to normalcy. Given all of the stimulus in the system, markets can continue to move higher, but we remain cautious as a lot of (future) good news is already priced in.”
James McCann, Senior Global Economist, Aberdeen Standard Investments:
"There’s nothing new in this announcement. The Fed is highlighting all the work it’s doing to support the economy and promising to do more if necessary. It’s sensible that the Fed take a brief pause to establish the impact of what they’ve already done. But they cannot afford to rest on their laurels.
Laure Goodwin, Economist, Multi-Asset Strategist, New York Life Investments:
"For investors, the takeaway is the same. Low interest rates are likely to persist for at least the next couple of years, until long after the virus’ immediate threat has cleared. Lower expected policy rates will contribute to lower yields across the curve. Savings rates are likely to rise, and investors will have to focus on companies that do well in low rate environments, such as large cap companies, growth stocks, or high quality balance sheets. We expect a non-linear back to work process, and that the new “normal” will look different. This likely points to risks and disappointments for investors in the near term. We are maintaining a defensive positioning in our portfolios.”
Matt Miskin, Co-Chef Investment Officer, John Hancock Investment Management:
“That is the right take by Powell [Powell’s stance that the economic pain is medium-term, not short-term]. This is going to take several months and potentially until the third quarter. Our view is that this is going to take into the fourth quarter to get this recovery back up and running. In terms of the market, we think we’ve gotten much of the returns we were expecting for the year in the last couple of weeks.”
Mike Loewengart, Head, Investment Strategy, E*Trade:
"Positive momentum amid a nasty GDP read speaks to the forward-looking nature of the markets. No one was expecting a good GDP read, and it’s not the worst we've ever seen. What’s more we don’t face a structural issue like we saw in '09. What may give market watchers pause though is the extent of the rally we’ve seen through April. It’s breathtaking in its ascent, eclipsed only by the downfall we saw right before. Exceptionally large moves are prone to corrections, and the market rarely makes a significant low without testing it. Investors shouldn’t be caught off guard or get too discouraged by another market drop in the next few weeks.
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