Many stocks are in correction territory. Thursday, they were all over the place.
The S&P 500 fell rose 0.3%, lifted by the large cap tech components of the Nasdaq, which rose 0.37%. There were several changes in market leadership on the day. The 10-Year Treasury yield, below expected inflation, was flat at 0.67%. That supports stocks, but since the yield is unlikely to fall much from here, low interest rates are unlikely to boost stocks from here.
Value stocks have also fallen considerably since September 2, the start date of the volatility. Investors are getting skittish about the continued speed of the economic recovery, although value has outperformed tech during the down month of September. But value was mixed Thursday, with consumer discretionary down a several tenths of a percentage point and manufacturing up by a similar amount. Banking and oil were largely flat. Large cap consumer staples rose a touch under 1%, signifying investors are positioning somewhat defensively, as nervousness over the economy is taking hold.
While Dr. Fauci did tell Congress he expects a coronavirus vaccine to be ready in a few months and that there could be 700 million doses distributed by April, the reopening of the economy may hit a tough wall against the lack of liquidity flowing through the economy. Small businesses, currently not fully opened, and households, many of which are without income, need cash. The Federal Reserve has already lowered interest rates to 0% and corporations have borrowed trillions this year and retired employees. Now, Congress needs to pass more fiscal stimulus, or free cash into the economy, but this hasn’t happened yet.
This is largely holding sentiment in cyclical value stocks, which ran up in the summer, back. Jobless claims have stalled, not decreased. For the past week, there were 870,000 jobless claims against 866,000 last week. The slowing of the economic recovery would threaten near-term earnings. Meanwhile, the virus is spreading, which doesn’t help small businesses or households. Plus, even a Blue Wave on Congress and the White House doesn’t guarantee cavalier spending, as the government debt burden is running up and a marginal Democrat control in Congress means it would only take a few centrist Democrats to curb spending ambitions.
Market sentiment, accordingly, has been very weak of late. About 25% of S&P 500 stocks are trading above their 50-day moving averages. This, according to many strategists on Wall Street, indicates a buying opportunity.
But there are many risks.
Here’s what Wall Street’s saying
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
"Typically, when the equity market is ramping, investors believe a pause in the upside would be healthy, but when you are in the heart of the pullback it certainly does not feel that way. Since we began looking for a period of correction driven by a pullback in the mega-cap “stay-at-home” areas, we suggested adding exposure as the pullback unfolded due to our positive fundamental core thesis. While the volatility may be with us – given the incredible uncertainty in (1) the election, (2) COVID-19 spread, (3) geopolitical tension with China, and (4) economic recovery – the combination of historic excess liquidity and a global synchronized economic pivot off the low suggests weakness should be used as opportunity as the market moves toward intermediate-term oversold territory.”
Mike Loewengart, Head, Investment Strategy, E*Trade:
"While jobless claims under a million for 4 straight weeks could be considered a positive, we’re staring down a pretty stagnant labor market. This has been a slow roll to recovery and with no signs of additional stimulus from Washington, jobless Americans will likely continue to exist in limbo. Further, a shaky labor market translates into a skittish consumer, and in the face of a pandemic that seemingly won’t go away without a vaccine, the outlook for the economy certainly comes into question. "
Team, Equity Strategy, Barclays:
"US large cap ecommerce/tech stocks have dominated the rally in global equities due to their newfound defensive safe-haven status and resilient earnings. However, we expect a rotation to more cyclical sectors in the US and Europe, given extended retail-driven valuations and a possible faster vaccine-driven economic recovery. Expect bumpier equity markets through the end of the year, but more so for the U.S. compared to Europe. We expect U.S. equities to struggle through the end of the year, as the potential for an upside surprise in the cyclical recovery is offset by key tail risks (U.S. election, vaccine development, and fiscal deal negotiations) and frothy valuations. At this point we believe that the market is “priced for perfection”, due to strong expectations that “resilient” stocks (i.e., large cap ecommerce stocks whose business models have flourished during the COVID-19 crisis) will continue to hold their market gains while other cyclicals are expected to have a significant rebound. These valuations seem too optimistic to us and have likely been driven by historically strong monetary stimulus and heightened retail investor activity, especially in large cap tech names and single-stock options. As these catalysts fade, a contraction in SPX valuations (especially in Resilient stocks) should lead to moderate declines in U.S. equities through the end of the year.”