Stocks got crushed Friday, as virus cases in the U.S. climbed and investors grew increasingly fearful that lockdowns will become a theme for the near-term. Now, liquidity concerns are trickling back into the market.
All three major U.S. indices sold off, with the S&P 500 down 2.42%. The 10-Year Treasury yield fell several basis points to 0.65%. Yields fall when prices rise. The S&P 500 fell about 2.8% this week on fears that lockdowns will become a theme.
Daily new coronavirus cases are at a 5-day moving average of 39,000, a record, according to Johns Hopkins data. Texas, which has seen an outsized surge in cases of late, is closing all bars and halting its reopening plan. Florida said it saw an almost 80% increase in daily cases Friday. After having stalled to observe the virus data, the market resumed falling this week as the situation in Texas and Florida took a negative turn.
Stocks fell even as retail sales for the month of May came in at an increase of 8.2% year-over-year, underscoring that a strong economic recovery was underway, a recovery now undermined by the current virus situation.
Lockdown and economically sensitive stocks sold off hard this Friday. Bank ETF (KBWB) - Get Invesco KBW Bank ETF Report fell 6%. Airlines fell hard with United Airlines (UAL) - Get United Airlines Holdings, Inc. Report down 5%. Consumer discretionary stocks fell, but less severely than the broader market. Nike (NKE) - Get NIKE, Inc. (NKE) Report fell 7.6% after the company reported Thursday that it missed revenue estimates badly, posted a net loss, and offered no guidance—all after the stock had run up considerably for the two weeks leading into earnings.
With lockdowns potentially entering the fray again, the market may have a baseline level of support given that the Federal Reserve is injecting liquidity into all areas of the bond market, but many have been calling for more fiscal stimulus. With checks sent directly to households, which did provide a meaningful bridge to reopenings in the second quarter, the government can directly stimulate the economy.
For the short-term, stocks are under pressure, but the broader theme of liquidity may blunt the downside of a potential correction. Bank of America Global Research noted last week that many investors are still holding large cash positions and noted Friday that its own private clients are only holding 57% of their portfolios in stocks, under the standard 60% recommended allocation.
Here’s what Wall Street’s saying:
Matthew Harrison, Biotech Analyst, Morgan Stanley:
“Are U.S. cases really increasing or is it just from more testing? The coincident rise in new cases, test positivity and new hospitalizations is evidence that the new U.s. cases are not jut from increased testing. As an example, since June 1, Texas cases and hospitalizations have doubled and the test positivity has rise from roughly 6% to roughly 13% despite an increasing number of tests.”
Ted Swimmer, Head, Corporate Finance, Capital Markets, Citizens Financial to TheStreet:
"Companies that are smaller and can’t access the bond market, if there’s another wave of this, will take a lot of pain. In the big corporate market, you’ve done okay and should be able to withstand what happens next. Overall, the markets have been incredibly supportive of new issuance on the bond side. I don’t expect that to change. Overall we’re seeing cash inflows to the bond markets."
Scott Knapp, Chief Market Strategist, CUNA Mutual Group:
"Because this is a recession with causes not seen in our lifetime, our traditional framework for building forecasts for the overall economy is not going to work as well as it has in the past. This is why we get such dramatic swings and inconsistencies in data from time to time, and it makes the landscape even murkier to get a read on right now."