Stocks surged in a largely risk-on day, Friday. The promise of low interest rates, strong retail sales and upbeat earnings reports boosted sentiment, although one political headwind remains.
The S&P 500 rose 0.67%, outpacing the tech-heavy Nasdaq’s gain of 0.6%, pointing to an impressive day for cyclical value stocks, as tech stocks have the heaviest market cap weigthing in the S&P by far.
The 10-Year treasury yield, which rose significantly for the week, fell to 0.73%, after having been down to 0.71% to start the day. Yields rise when prices fall. The yield has risen as the Federal Reserve has now adopted a new long-term policy that is — in theory — highly inflationary. Meanwhile, yields were already reflecting the ultra-low benchmark short-term lending rate of 0%.
The Fed’s decision boosted stocks Thursday and may have had a hand in the rally Friday, even though the new policy does little to change what the market knew the Fed was already doing: pumping liquidity into all areas of the bond market, which has already been priced into stocks. But if there was any concern that the Fed could lift rates in the next few years, the policy announcement Thursday wiped those concerns away, even though investors know the Fed could conceivably reroute its policy upon some sustainable spike in inflation in the future.
As the yield curve has expanded this week, a positive for bank profitability, banks stocks rose about 0.5% Friday.
But it was the retail sector that got investors very excited Friday. Retail sales for July rose 1.9%, ahead of economists expectations of 1.6%, pointing to continued strength in the consumers’ recovery.
Ulta Beauty (ULTA) - Get Report also reported earnings and beat bottom-line expectations by a wide margin, while sales of $1 billion missed estimates of $1.25 billion. But it wasn’t operating leverage that did the trick, but rather a lower tax rate and other items. The sales miss didn’t deter the market from sending the shares up 5.84%, as management said sales fell 10% year-over-year in July, better than 37% to start the quarter. Plus, the company is opening dozens of news stores. This all points to what other companies across sectors have also pointed to on earnings: the economy is certainly rebounding into what is expected to be a strong 2021.
Unfortunately, recently low levels of consumer confidence in August is a negative indication for future consumer spend and the data points aren’t surprising. Some of the recent consumer spend has been on the back of fiscal stimulus. But with Congress on break for the summer, no fiscal bill will pass until at least September. Meanwhile, many small businesses are still shut down and in need of cash. Unemployment may have a hard time falling at the same rate it has over the past few months. This would slow down the recovery and threaten the narrative that 2021 will sport levels of economic activity and corporate earnings seen before the virus.
Overall, cyclical value stocks have been participating in the rally of late, though growth tech is still largely outperforming. Still, valuation levels compared to interest rates are fairly low, making any near-term stock market drawdown either fairly unlikely or potentially rather benign.
Here’s what Wall Street’s saying:
Ken Berman, Strategist, Gorilla Trades:
“Personal spending increased by slightly more-than-expected, just as personal income, and the previous readings of both indicators were also revised higher, which is great news for the consumer economy.”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"In this widely anticipated move, the Fed will now target inflation “that averages 2% over time,” so that after periods of persistent below target inflation it will aim to “achieve inflation moderately above 2% for some time.” Under this new framework, the Fed is likely to refrain from tightening rates until inflation overshoots the 2% target. With core inflation currently well shy of the target and the economy operating far below full capacity, this suggests rates will stay very low for an extended period of time. We have kept our yield forecasts unchanged and still expect US Treasury yields to move only slowly higher as the economy continues to recover. We forecast 10-year yields to reach 0.85% by June 2021.”
Brian Levitt, Global Market Strategist, Invesco:
"Are US stocks overvalued? It’s among the leading question I’m receiving, along with whether candidate X or Y, if (re)elected, will tank the market. The answer to the latter, viewed through history’s lens, is a resounding no.On an absolute basis, across different valuations metrics—price to earnings, price to sales, cyclically adjusted price to earnings (CAPE), market capitalization as a percent of Gross Domestic Product, and others—US equities, as represented by the S&P 500 Index, appear overvalued.1 On a relative basis, that’s not the case. Stocks, given today’s low interest rate environment, are trading as cheap to bonds as ever. For every dollar invested in the broad US equity market, companies are earning 4.4%.2 Every dollar invested in a 10-year US Treasury rate yields roughly 0.5%.3 Seen through that lens, it’s hard to make the case that equities aren’t attractive. Low interest rates tend to be supportive for equity multiples, as they inflate the value of future cash flow and tend to push equity market multiples higher.”
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