Stocks rose Wednesday on several tailwinds, although some data suggest headwinds may be on the horizon.
The S&P 500 rose 0.64%, on the strength of many sectors, rather than leaning on the tech-heavy Nasdaq, which rose just 0.52%. The 10-Year Treasury yield, bullishly, spiked to 0.55% from 0.5%. Yields rise when prices fall.
Johnson and Johnson (JNJ) - Get Report said it has a $1 billion funding deal with the U.S. government to produce 100 million units of a coronavirus vaccine, which has already shown effectiveness with monkeys. Pfizer (PFE) - Get Report also has a deal with a U.S. government agency to produce 1 billion doses by the end of 2021. Johnson and Johnson rose 0.79%, while Pfizer shares were pressured, up just 0.08%.
Also, the White House will send U.S. trade representative Robert Lighthizer to speak to Chinese officials about a trade deal, which investors were not expecting as tensions between the two nations have percolated.
Cyclical sectors were leading the market. Consumer discretionary rose more than 1%, while oil rose 1%. Banks rose 1.73%. They have been underperforming large cap value stocks in the U.S. since late June, as the yield curve has compressed. Wednesday, the yield curve expanded extraordinarily.
More broadly, the compressed yield curve is signaling that bond investors are more tepid on the speed of the economic recovery than stock investors have been. Importantly, cyclical value has had a nice run since late June, as lowered valuations were met with strong earnings reports. The vast majority of companies are beating earnings — and by a wide margin. That's supporting sentiment, which is somewhat rickety right now.
Treasury investors have been pointing out that paused state reopening, met with a potentially less sufficient and slower-developing fiscal stimulus bill is slowing the recovery. Meanwhile, interest rates cannot fall much from here. High-frequency economic data, like retail and restaurant activity has continued to track poorly of late.
Plus, the ADP jobs report out Thursday showed that only 167,000 jobs were added in July, below estimates of 1 million.
Here's what Wall Street's saying:
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
"The S&P 500 (SPX) is bumping up against our 3300+ 12-month target, suggesting limited upside from current levels. Remember, the “+” in the target is because it was our minimum since we have no idea what multiple to use with an unlimited level of monetary stimulus and backstop of credit from the Fed. The combination of excess liquidity, monetary and fiscal policy, and global economic turn off the bottom reinforce adding risk exposure on any meaningful pullbacks despite the proximity of our target. We believe the fear of another COVID-19 panic and subsequent credit risk has caused investors to under-appreciate the potential for a synchronized global recovery in 2021 that should benefit the economically sensitive areas that are struggling to gain traction given the success of the “stay-at-home” mega-cap stocks.”"
Team, Equity Research, Goldman Sachs:
"The reopening scale moves to a ‘4’ [from below 4] as e-commerce, video conferencing and other stay-at-home categories moderate, while the return of sports and modest improvements in restaurants, ride hailing, and lodging aid back-to-normal."
Kimberly Greenberger, Specialty Retail Analyst, Morgan Stanley:
"July Week 4 North America Total Discretionary Retail Traffic slightly worsens for the third consecutive week (-1.1 pts w/w July Week 4 vs. -2.0 pts w/w July Week 3 vs. -1.6 pts July Week 2), putting July total traffic at -47.4% y/y and retail 2Q20 at -62.2% y/y. We don’t expect traffic to recover beyond our previously estimated -40% to -50% range until a vaccine is widely available.”