Stocks rose sharply Tuesday, led by semiconductors, but with broad sector participation. Still, some on Wall Street are touting investments that can largely elude economic headwinds, which may be on the way.
All three major U.S. indices rose, with the S&P 500 up 1.54%, a gain aided by the tech-heavy Nasdaq, many components of which are heavily weighted in the S&P 500. The Nasdaq rose 1.87%. The 10-Year Treasury yield rose to 0.66%. Yields rise when prices fall. Stocks are pricing in a fast recovery, even if not fully V-shaped, as the S&P 500 is down just 8.8% from its all-time-high before the virus was recognized as a pandemic in March.
Federal Reserve Chairman Jerome Powell testified before Congress, but did not say much in the way of market moving information or perspective. His formal remarks before the testimony highlighted economic uncertainty and hinted at the need for more fiscal stimulus, as low interest rates and ongoing monetary support may have a fading marginal impact on the economy and market going forward. Some current economic headwinds are a lack of political will for more fiscal spending, lockdowns becoming a widespread theme, and jobs coming back at a slower-than-expected rate, independent of all the other factors.
Still, cyclical sectors joined the rally Tuesday. Oil and banking rose more than 2%. Large cap consumer discretionary rose 0.6%. Value stocks, many of which are cyclical, have sold off relatively severely in June and some traders think portfolio managers are rebalancing and adding to value stocks to show clients positioning for a second-half economic recovery.
The rally Tuesday was lead by semiconductors, as Micron MU reported much better than expected revenue and earnings Monday after the market close, on the back of strength in cloud spending and data center chip sales. Cloud spend is a work-from-home trend accelerated by the virus and a tailwind for chip stocks exposed to the trend. Micron rose 4.83% and the iShares PHLX semiconductor ETF SOXX rose 2.59%. That helped power the Nasdaq.
Here’s what Wall Street’s saying:
Team, Nuveen Investments:
"Focus on Quality & Cash Flow – As growth stocks and cyclicals continue to battle throughout the remainder of the year, investors should focus on quality for protection from volatility. We also have a strong bias toward companies with high levels of free cash flow that have the ability to reinvest in their businesses and return value to shareholders. Stick with Growth Stocks – We think growth will continue to benefit over the long term, given a persistent environment of relatively slow economic growth. In terms of value stocks, cyclical sectors and small caps enjoy better relative valuations and could be due for a near-term bounce, especially if global economic reopening accelerates. Shifting to Digital – Following the broad-scale shift to social distancing and remote work, Nuveen is focusing on companies that could achieve long-term advantages from an increasing shift to digital and online consumption."
Ryan Detrick, Senior Market Strategist, LPL Financial:
"Although the US economic recovery has picked up and we expect yields to rise in the second half of 2020, structural forces may help limit the size of the move. The pandemic-driven demand shock, the Federal Reserve, and disinflationary pressures may likely keep yields low for quite some time."
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