Stocks fell Thursday, a move that was strangely accompanied by a move out of safe assets, which investors were net buyers for most of the day. Wall Street is getting increasingly nervous about the richly valued stock market against a myriad of risks.
All three major U.S. indices fell, with the S&P 500 down 0.9%. The 10 year treasury bond, a safe haven asset, saw its yield rise to 0.64% after touching 0.59% by noon, signifying investors began selling the bond. Gold prices fell 0.9%, although standard risk-off sentiment would see gold higher. Oil prices, which rise when the outlook for the global economy brightens, rose 24% to $18.7 a barrel.
Still, Wall Street is largely cautious and the S&P 500 has had trouble moving past the 2,900 level, which it’s hanging around now.
Valuations are stretching, as the market has roared 30% from its March 23 bear market low and as the market has looked past a rough Q1 and Q2 of earnings. The equity risk premium — the excess rate of expected return on stocks for a year minus the yield on the safe 10 year treasury bond — is below 4%. Historically, it sits at around 3.5% and can shoot higher when sentiment is poor. It hit 7% in March when prices plummeted.
And the market showed many signs of nervousness Thursday. McDonald’s (MCD) - Get Report posted a revenue beat for its Q1 earnings report, but said the negative sales trends it was seeing in the U.S. to end March were trickling into April. Most companies have gotten a pass on that type of comment, but McDonald’s was up 11.5% for April into earnings and trading at the higher end of its recent valuation range — at 27 times forward earnings.
Meanwhile, investors are weighing the Thursday earnings reports of Apple (AAPL) - Get Report and Amazon (AMZN) - Get Report. For Apple, investors want to see if services can outweigh stress in hardware and when the 5G launch may be. For Amazon, investors want proof of the thesis that e-commerce and cloud trends are accelerating as a result of the pandemic. Both stocks have soared into earnings.
Importantly, investors have been capable are buying a few stocks to have exposure to the market while cautioning against taking large positions.
Here’s what Wall Street’s saying about the broader environment:
Barry Bannister, Head, Institutional Equity Strategy, Stifel:
"We called the relief rally to 2,750 and then 2,950 (the latter admittedly more aspirational with reflation absent), but now decline to raise our 2,950 target price. We believe support for the S&P 500 price today likely requires a positive 3Q 2020 GDP inflection (i.e., bad data getting less bad) to reduce 2021 earnings per share risk, but we believe such visibility is still lacking and choose not to raise our S&P 500 target price from 2,950 (having reached that intra-day 4/29/20), pending more 2Q 2020 economic data.”
Lori Calvasina, Chief U.S. Equity Strategist, RBC Capital Markets:
"The rebound has been legitimate but is also fragile. US equities have been rebounding since late March due to the improved outlook for the coronavirus, Fed stimulus, the belief the recession will be of short duration, and excitement over reopening the economy. News flow has been more good than bad in recent weeks. A second wave of infections and any evidence that the economy may continue to deteriorate beyond 2Q could cause stocks to turn lower quickly. A lack of visibility on earnings also seems likely to keep conditions choppy in coming months. Rallies ranged from 30% to 80% trough to peak, and P/E expansion ranged from 20% to 49% (we estimate 31% expansion has occurred, more if our EPS forecasts are too high. From the mid- recession trough in the stock market to its six-month high after the recession ended, the S&P 500 posted a median and average rally of 34% and 41%, respectively. So far, the S&P 500 is up 31% from its March 23rd low."
Team, Unigestion Asset Management:
"This week’s economic data leads us to believe that markets have not even begun to feel the full force of the pandemic’s impact. The depressed commercial activity, reduced consumer spending and wider layoffs we’re seeing now are going to hit corporate earnings hard over the next couple of quarters. It seems very unlikely that the government bailouts will be able to keep pace with – or offset – the free-fall. Investors now face a real predicament because traditional ‘safe havens’ in the fixed income market are offering paltry yields with mounting risks. The Federal Reserve can try to prop up corporate and municipal bonds, but that only addresses liquidity concerns – not the fundamental threat of reduced consumer spending, downgrades and defaults. For investors taking a long view, the prudent move will be to reduce exposure to fixed income and increase exposure to some mix of hedged equity and alternative assets. The smart long-run play is remaining exposed to the equity market while hedging the inevitable near-term downside. There is no logic in trying to time the market.”
Deepak Puri, Chief Investment Officer, Deutsche Bank Wealth Management:
“Looking ahead, we should expect that the worst is yet to come for economic output. Our base case is that the U.S. economy will contract by 5.7% in 2020. Some key downside risks are contingent on hoe effective society is in reopening the economy without sparking a second wave of infections. However, any discovery of effective treatments (along with an eventual vaccine) should provide justification for the recent bullish price action seen in equities.”
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