Two Tailwinds Powering Wednesday's Risk-On Market

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Investors were optimistic on Wednesday, with the prices of stocks and oil up and safe bonds down. Coronavirus news flow shows a light at the end of the tunnel, while struggling households and small businesses may see more near-term relief. 

All three major U.S. indices were higher, with the S&P 500 up as much as 1.4%. The 10 year treasury yield rose to 0.76%, up from 0.59% less than a week ago. Crude oil rose as much as 5%.

Wuhan, China, the birthplace of the virus, is starting to ease its lockdown and thousands of citizens are traveling by train. That’s good news for any company with manufacturing or sales exposure to China, but it also may indicate the timeline for the flattening of the spread curve. Also, a peak case count is expected in New York, the epicenter of the crisis, within a week or so. 

For the short-run, households and small businesses need funds, as tens of millions have been laid off and small businesses face the very real possibility of closing doors. 

Democratic House Speaker, Nancy Pelosi, has said that there may soon be an added $1 trillion in government stimulus for the economy. There has also been talk of an added $350 billion — on top of the current $350 billion — in lending to small businesses, although much of the debt can be forgiven if businesses retain employees. 

Small businesses account for roughly 45% of economic output and the consumer represents about 70%, so keeping those pillars of the economy afloat is important. 

As for stocks, banks were leading the way, with JPMorgan  (JPM) - Get Report. , Bank of America  (BAC) - Get Report and Wells Fargo  (WFC) - Get Report all up as much as 2%. The 0.6 percentage point difference in yield between the 10 year and 3 month treasury bills is an improvement over several weeks ago, lifting the outlook for bank profits. 

While the outlook for banks moved incrementally more positive, Bank analysts at Goldman Sachs do point out that earnings per share for large-cap banks could fall 40% from initial estimates in 2020 and 16% in 2021 and 10% in 2020. But JPM, for instance, is only down 34% year-to-date. The analyst said higher net interest income on the back of strong loan volumes won't be nearly enough to offset credit losses and other headwinds. 

Oil stocks also rose, but the large players didn’t rise as much as the price of crude oil did. 

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