Stocks rose Friday, but were erratic all day. The last few days have been largely risk-off, with the S&P 500 in danger of correcting, as coronavirus cases have ticked up in recent weeks.
All three major U.S. indices rose considerably, with the S&P 500 up 1%. The 10-Year Treasury yield rose to 0.7%. The S&P 500 was down as much as 0.4% and up as much as 2.5% Friday, flickering back and fourth all day before finally ending the end with gains.
Most sectors and classes of stocks rallied. Consumer discretionary, banking, oil and industrials rallied. Value and growth coexisted, both experiencing sold gains. The Russell 3,000, the main U.s. small cap index, rose 0.8.%.
But since Wednesday's close, the S&P 500 is down 6%, more than halfway to a correction in percentage terms. Cyclical value stocks had outperformed growth and tech since between mid May and the beginning of this week, another guidepost pointing towards a sharp economic recovery from the current recession.
But then the data trickled in from medical informational hubs and institutions showing the spread of the virus is accelerating again. Coronavirus cases are climbing in nearly half the states in the U.S. as businesses reopen following lockdown measures and stay-at-home orders. John Hopkins data show the 5 day moving average of daily cases in the U.S. has ticked above 20,000, above 17,000 a few weeks ago. Investors are nervous, but it may be more lockdowns that would meaningfully accelerate a drawdown in stocks, which are trading at rich valuations against interest rates, especially rich if assumptions are for economic hardship ahead.
And since Wednesday, the Vanguard S&P 500 Value etf (VOOV) - Get Vanguard S&P 500 Value ETF Report fell 8.5% while its growth counterpart (VOOG) - Get Vanguard S&P 500 Growth ETF Report fell just 4.2%, signaling investors are favoring growth stocks that can power through economic headwinds. The S&P Technology Select Sector SPDR etf (XLK) - Get Technology Select Sector SPDR Fund Report, which is about 40% weighted towards Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report and Apple (AAPL) - Get Apple Inc. (AAPL) Report, fell just 4.8% since Wednesday.
Furthering the risk-off sentiment, a consumer discretionary just out with earnings, Lulu Lemon (LULU) - Get Lululemon Athletica Inc (LULU) Report, has seen a massive down move. Lulu Lemon was fell 5% Friday is and is down almost 10% since Wednesday, as the company missed revenue and earnings estimates Thursday, but also did not offer guidance or even same-store-sales results for the reported quarter. The metric is an important component to the stock’s expansive valuation and the company made clear it has limited visibility into the near future, even as stores reopen. Importantly, the stock did enter earnings trading at an expensive valuation of 69 times forward earnings, rich even for Lulu’s impressive long-term growth profile.
Here’s what Wall Street’s Saying:
Matthew Harrison, Biotech Analyst, Morgan Stanley:
“Many U.S. states have recently reached a new peak in daily new cases. Some investors have suggested that the case growth is primarily driven by higher testing volume. Our analysis demonstrates higher testing is not the main driver of new cases. We conclude act community spread is likely still ongoing.”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"A sober assessment of economic recovery prospects from Federal Reserve Chair Jerome Powell and concerns over rising coronavirus infections in some US states weighed on equity markets. Rising numbers of new coronavirus cases in some US states that have reopened also prompted news headlines about the potential for a broad “second wave” of infections. We are still confident that with positive medical developments and supportive stimulus measures, economies will be able to reopen sustainably without a second wave of infection overwhelming healthcare systems. We do not see the latest US virus developments leading to a reimposition of national, or even statewide, lockdowns.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
"What to remember as consolidation plays out. This indigestion could last a few weeks/months but it is important to remember why the markets had engaged the risk-on rally in the first place, and why we want to add exposure as the market pulls back: (1) the Fed clearly stated it will support risk until it achieve the two mandates of full employment and 2% core inflation, (2) much closer proximity to a vaccine for COVID-19, and (3) signs the worst of the economic shutdown remains behind us.”
Barry Bannister, Head, Institutional Equity Strategy Stifel:
"On Jun-8 the S&P 500 came within 99.5% of our 3,250 end-of-August target but quickly reversed this week, catching us offsides for three reasons we can surmise: (1) Shifting 2020 election trends threaten the tax cuts and deregulation, (2) Fed pledged to continue easing but did not increase the pace, a “2nd derivative” tightening, and (3) a double-dip recession is possible if media and government continue portraying SARS-Cov2 as a modern-day plague. As speculative froth created by excess liquidity peaks and fundamental analysis returns we switch to Equity Risk Premium for S&P 500 price targets: we see 3,100 in End December, 2020. The S&P 500 has been a buy at Equity Risk Premium (ERP) peaks and a sell at ERP lows since the 2007-08 Crisis.”
Binay Chandgothia, Portfolio Manager, Principal Global Investors:
"The FAMANG’s specifically have grown to represent nearly 26% of the S&P 500, and the size, scope and business models of tech companies may offer a sustained, competitive advantage in our new normal that cannot be overlooked, despite how expensive they appear to have become. A meaningful reversion to ex-U.S. equites or small caps or non-technology cyclicals is possible but that would require a noticeable pick-up in global growth, inflation and bond yields. At this stage, we are maintaining our positive stance on outperforming asset classes, including the technology sector, while opportunistically adding those where valuations are cheap enough and underlying drivers of growth are beginning to look positive.”