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Why the Risk-on Market Move Monday Is Different

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Stocks maintained their strength by midday Monday, as investors grew optimistic on a fast economic recovery from the coronavirus-induced recession

All three major U.S. indices saw considerable gains, with the S&P 500 up about 3%. The 10 year treasury yield rose to 0.7%. Yields rise as prices fall. 

Much of the optimism came on the back of Federal Reserve Chairman Jerome Powell’s comments to CBS’s 60 minutes, when Powell said he is looking for a sharp economic recovery and positive GDP growth in the third quarter. 

And Moderna  (MRNA) - Get Moderna Inc. Report said its coronavirus vaccine human testing showed positive results. The stock rose 24%. 

But making Monday’s rally particularly bullish was the price action of one sector and one class of stocks: banks and small caps. 

The Invesco KBW Bank ETF  (KBWB) - Get Invesco KBW Bank ETF Report, which holds 70% regional banks — highly sensitive to the yield curve — rose 6% Monday. Banks have underperformed while the S&P 500 has risen 32% since March 23, the bear market low. Banks have risen 22% since that date, as the rally has been predicated on low interest rates, which weigh on banks’ net interest margins, even though they may spur loan volumes. But with the yield curve expanding slightly Monday, bank bullishness is more warranted. 

And the Russell 2000 index of small cap stocks have only moved in line with the S&P 500 since March 23 as of Monday’s 5% up move. Small caps can be more volatile than the broader market is for several reasons relating to debt levels, access to capital markets and vulnerability to economic distress. A surge in small cap stocks is another bullish signal. 

The risk which has been overpowered by the potential rewards Monday was the ongoing spa between the U.S. and China. China, most recently, has said Apple  (AAPL) - Get Apple Inc. Report and Boeing are on its unreliable entities list and may be subject to restrictions. Apple and Boeing still rose 2.1% and 9.9%, respectively. Apple is slowly reopening stores

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