Recent Run in Stocks Isn’t Truly Risk-On — ICYMI

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The U.S. stock market has run up in the past week or so as investors got past the coronavirus concern – maybe justifiably so. But the rally hasn’t truly been “risk-on”: Investors’ apparent bullishness isn’t completely unfettered.

This week, a breakthrough in the search for a vaccine for the deadly coronavirus has emerged, validating the stance most on Wall Street have taken, which is that the virus will be eradicated just as SARS was in 2003.

Stocks rose Thursday, with the S&P 500 up 0.3% on the day and 1.91% in the past five days. And since Jan. 17, when stocks began selling off on coronavirus concerns, the market has risen 0.5%.

But in what some have called the most hated bull run in history, stocks have risen while plenty of money has also rushed into Treasury securities, which are safer than equities.

That’s consistent with the low-interest-rate environment investors have demanded of the Federal Reserve to ensure sustained economic growth.

“Year-to-date performance of different factors and industry groups in the U.S. shows more defensive positioning,” wrote Morgan Stanley Equities strategist Michael Wilson in a note.

“Investors continue to embrace growth, but also favor higher quality, less volatile stocks with larger market caps. Being constructive is not the same as outright bullish.”

First, stocks that Morgan Stanley classifies as low volatility have outperformed, gaining about 3.8% for the year, while the S&P 500 has gained 3.5%.

The Dow Jones Utilities index, often seen as a proxy for bonds, is up 6% for the year. Con Edson ED, one of the most recognized utility stocks in the country, currently pays a dividend yield of 3.27%, a premium to the government-bond market.

The Investors Real Estate Trust IRET is up 8.28% year-to-date. The Invesco Consumer Staples S&P ETF is up 3.9% for the year.

Health-care stocks remain pressured, due to regulatory threats related to the 2020 presidential election.

Meanwhile, cyclical sectors like energy and materials have underperformed for the year, down 7.6% and up 2.3%, respectively.

Industrials have outperformed on some indexes and underperformed on others. Large industrials like Caterpillar CAT have underperformed.

To Wilson’s point, some but not all growth stocks — regardless of economic sensitivity — have performed well. Microsoft MSFT, which pursues revenue streams less correlated to economic changes, is up 13% on the year, as its earnings have continued to grow strongly in the secular growth trend of cloud computing.

Perhaps the biggest risk-off signal complementing the stock-market rally has been rising government-bond prices. (Yields fall as prices rise.)

In a classic risk-on market, yields should rise, as economic growth promises higher inflation, bringing about higher rates induced by the Fed. But the 10-year yield has fallen to 1.64% from a starting point in 2020 of 1.87%.

Recently, some have grown wary that while economic fundamentals have ticked up in 2020, the Fed will need to slash its benchmark lending rate to keep liquidity flowing through an economy in need of stimulation.

Wall Street has largely touted 2020 as a year of reaccelerating economic growth, but its enthusiasm isn’t unbridled.

In late 2018, the economy headed up, with GDP running at close to 4%. The Fed raised rates and stocks sold off. Now, stable growth has been supported by low rates.

This hot stock market is tepid under the surface.