Stocks had a strong day Friday and more economically-sensitive areas of the financial market shined for a change. Sentiment was poor in premarket trading Friday until Gilead Sciences (GILD) - Get Gilead Sciences, Inc. (GILD) Report had some good news for the market and the world: a study suggested its developmental drug remdesivir reduces the mortality rate in COVID-19 patients.
The S&P 500 rose 1.05%, while the tech-heavy Nasdaq, an outperformer by a wide margin this year, rose just 0.66%. The 10-Year Treasury yield rose to 0.63%. Yields rise when prices fall.
Before the market open, cyclical stocks were falling and the 10-Year Treasury yield was down to 0.59%, the lowest it has been in months. New daily coronavirus cases hit 63,000 in the U.S., according to Johns Hopkins data.
Investors do expect a new round of fiscal stimulus, which is sometimes slightly more effective in keeping households and small businesses liquid than monetary stimulus is. That would significantly lessen the negative impact of more lockdowns. Still, investors have been selling economically-sensitive and lockdown-sensitive stocks since mid-June, as cases have risen and states have paused reopening plans.
Minutes before the market opened Friday, Gilead Sciences said its phase III coronavirus vaccine testing was yielding largely positive results. Risk sentiment flipped positive. Gilled shares rose 2.15%.
The Vanguard S&P 500 Value ETF (VOOV) - Get Vanguard S&P 500 Value ETF Report, home to some defensive but also many cyclical names, rose 1.76% on the day. Oil, consumer discretionary, industrials and small caps rallied. And bank stocks rallied hugely. The Invesco KBW Bank ETF (KBWB) - Get Invesco KBW Bank ETF Report rose 5.26%. Sure, the yield curve expanded some, but bank stocks are in a bear market since June 8, with the ETF down about 30% since that date. Banks are trading at below their book values, whereas they usually trade at modest multiples of book value. With earnings upcoming, investors are buying bank stocks ahead of the reports.
Since June 8, the S&P 500 has fared decently given the economic turbulence, but that’s because of a massive run-up in growth tech stocks, which investors favor for their secular growth drivers that can overpower economic headwinds.
But the market is bifurcated.
Many cyclical stocks are in correction territory since June 8. The Vanguard value ETF is down 9.5% since that date, with oil stocks plummeting. This leaves a tremendous valuation discrepancy, leaving cyclical value ripe for the picking, so long as investors believe in their fundamentals.
Here’s what Wall Street’s saying:
Scott Knapp, Chief Market Strategist, CUNA Mutual Group:
"Bearishness is still the dominant view among investors, so horrible economic and earnings data have not moved markets nearly to the degree that several positive surprises have in recent weeks."
Jon Curran, Senior Bank Analyst, Investment Manager, Aberdeen Standard Investments to TheStreet:
“[bank] Earnings next week are going to focus a lot on guidance for loan losses. I don’t think they’re [management teams] going to be able to put hard numbers around eventual losses. It’s really critical to infer from what management teams say abut the outlook.”
Lindsey Bell, Chief Investment Strategist, Ally Invest:
"Second quarter earnings reports may not be pretty. But expectations for next year have stabilized. If investors stay more focused on next year’s earnings estimates than next week’s, the market will likely keep its head above water.”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"We don’t expect these negative headlines to derail the economic recovery, which based on the latest US data is showing encouraging signs. That said, volatility is likely to stay high into the year-end due to the pandemic, US-China tensions, and the upcoming US presidential election."