Stocks Eke Out Gain but Could Be in Midst of Correction: What Wall Street’s Saying

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Stocks flipped positive Monday, but they could be in midst of correction, some on Wall Street think. The gains, a reversal from the morning, were driven by big tech. 

All three major U.S. indices rose Monday, although the Global Dow fell 1.36% The S&P 500, after having lost 1% in the morning, ended the day up 0.42%. The 10 year treasury yield rose to 0.64%, as investors’ move into safety has featured cash and gold of late. Gold rose 0.66%, signaling a defensive posture in the market. 

Monday, Florida began lifting lockdown restrictions, which the market had rallied on weeks ago. Risks that lockdowns don’t go well or cause a reaccelerating of Coronavirus infections infections remain. President Trump’s threat of more tariffs on China, in retaliation for its handling of the outbreak, is an added risk. Stock valuations have stretched as earnings estimates for 2020 have come way down. 

Stocks are down 3.7% since Thursday. A correction is a 10% down move. Thursday, the S&P 500 hit 2,950, the highest its been since its recovery that began March 23. 

Pushing the index into positive territory were up moves between 1% and 2% from big tech, a group that accounts for roughly 20% of the S&P 500’s market cap. The tech stocks that rose, and have reported several points of recessions-resistant optimism on earnings, were Amazon  (AMZN) - Get, Inc. Report, Apple  (AAPL) - Get Apple Inc. (AAPL) Report, Facebook  (FB) - Get Facebook, Inc. Class A Report, Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report and Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report. Those points have overshadowed negative points, like falling iPhone sales year-over-year. 

As for risk sentiment, some cyclical stocks outperformed, while some did not, as was the case for defensive sectors. 

The Invesco Bank ETF  (KBWB) - Get Invesco KBW Bank ETF Report, a regional bank ETF, fell 1.2%, a risk-off signal. Regional banks’ businesses are mostly weighted towards loan volumes interest rates, neither of which are expected to rise when economic uncertainty takes hold. 

Credit markets, another key economic and market indicator, also continue to show stress. Shares of the iShares ibox High Yield Corporate Bond ETF HYG, fell 0.14% Monday and are down 2.36% since Thursday. 

Here’s what Wall Street is saying: 

Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:

“Sell in May and go away? No. We believe this correction could be a meaningful (10%) but necessary pause that refreshes. Our bullish view has not changed, nor has the narrative — a severe recession acknowledged by all, the bottoming rate of change in economic data/earnings revisions, seemingly unlimited central bank support, unprecedented fiscal stimulus that we believe is likely to become structural in nature and that leads to rising inflation expectations sooner than consensus expects.” 

Mark Haefele, Chief Investment Officer, UBS Global Wealth Management:

"We expect stocks to remain volatile as markets struggle to find a balance between announcements on the lifting of lockdowns, data on potential treatments and vaccines, economic releases, news on the course of the pandemic, and changing political dynamics. In our view, investors should remain positioned for upside, but also sufficiently diversified to protect against potential negative surprises. We advocate a combination of credit, including US high yield, US investment grade, and USD emerging market sovereign bonds; select equities; and strategies that can take advantage of elevated volatility, such as put writing."

Jason Pride, Chief Investment Officer, Private Wealth, Glenmede: 

"Investors are starting to look forward to greener pastures. Reopening will likely be gradual and dependent on local conditions within individual states and localities."

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