Stocks were mixed and dragged down by the continued pressure on tech stocks Friday. Risk sentiment was decent in the market, but valuation concerns are cropping up across the map.
The S&P 500 rose 0.05%, held back by the tech-heavy Nasdaq, down 0.6%. The 10-Year Treasury yield was pressured, dow to 0.67%, even with a solid read on inflation. The Federal Reserve’s bond-buying program and promise to keep rates low in order to stimulate that inflation is keeping treasury prices elevated. Yields fall when prices rise.
This week, there have been some head fakes in tech, as investors buy the dip in some moments. That has been followed by more pressure on these stocks. The Nasdaq 100, which encapsulates some of the most high-flying growth tech names in the U.S., is down 11% since Sept. 2, the start of the selling. Investors are reassessing valuations for growth names in cloud, streaming and e-commerce, stay-at-home beneficiaries, which may be seeing a giant pull-forward of demand from out-years.
Meanwhile, value stocks have participated in the larger rally since the summer and were up again Friday. Pushing that gain was consumer price inflation for August of 0.4% against estimates of 0.3%. This speaks to the continued strength of the economic recovery, which has benefited particularly digital-oriented companies like Nike (NKE) - Get NIKE, Inc. (NKE) Report (up 3%). Consumer discretionary rose 0.55% Friday. All other large cap cyclical groups of stocks rose as well. Valuations, though, are beginning to stretch, especially compared to interest rates. Analysts are beginning to caution of the froth in some consumer names.
One theme still upholding stocks for the near-term: investors still have loads of cash on hand that they had built up during the throes of the pandemic earlier on in the year. Institutional cash holdings, according to St. Louis Fed data, are still up 30% since mid-February, even as investors have drawn on that cash throughout the year.
Here’s what Wall street’s saying:
Ken Berman, Strategist, Gorilla Trades:
“The Consumer Price Index (CPI) and the core CPI both came in at 0.4%, above the consensus estimates, confirming the bullish message of yesterday’s Producer Price Index (PPI). While inflation shouldn’t be in an issue in the post-COVID world, and the Fed just changed the way it measures price pressures.”
Michael Sheldon, Chief Investment Officer, RDM Financial Group:
“The recent selling looks more like a pullback to us so far as the market works off overbought conditions, assesses recent economic data, reacts to news out of Washington regarding failed stimulus talks and awaits the outcome of the election later this year. The S&P 500 still remains solidly above its 200 day moving average, June peak and 50 day moving average (for now).”
Lauren Goodwin, Economist, Multi-Asset Strategist, New York Life Investments on the Election:
"On balance, we take a bit of both, using active managers to determine potential winners from losers. We continue to hedge the high valuations of U.S. growth companies with an allocation to U.S. value stocks and value-driven international developed equity. Higher deficit spending, economic reflation and higher economic growth could result in higher interest rates, all else equal. That said, all else is not equal. The Fed is likely to keep policy rates low for the foreseeable future, even as inflation rises. We expect interest rates to remain rangebound for the foreseeable future.”
Jen Redding, Retail Analyst, Wedbush Securities to TheStreet:
"Retail valuations are getting a little stretched here. For being in COVID in the pandemic, people are looking past it. All the retailers that we cover, the majority of them beat consensus estimates. The consumer is stronger than expected. Some of it is being fueled by the first round stimulus packages. You saw a lot of that gong to discretionary spending. You can still see it going into August into September. The spending is still there for back to school, but the curve is faltering. Valuations are kind of stretched because we don’t have visibility in the back half of COVID.”
Team, Bank of America Global Research:
“No bear market when Fed so easy and Wall Street so flush with cash…Money market fund assets = $4.5 trillion.”