Despite several negative developments Friday, cyclical stocks performed well. Major indices were dragged down by poor performance in tech.
The S&P 500 was essentially flat and weighed down by the tech-heavy Nasdaq’s loss of 0.21%. Tech has a heavy market cap weighting in the S&P 500.
The 10-Year Treasury yield, bearishly, slipped to 0.71%. This week, it spiked from 0.5% as the Treasury Department issued tens of billions of dollars of new long-term bonds, putting price pressure on treasuries, although investors have been aware the Federal Reserve and general economic uncertainty will keep rates pressured for the near-term. About $1.8 billion flowed out of government bonds this week, according to Bank of America Global Research. These low rates are supporting stock prices, but they are reflective of a rough economic environment.
Cyclical stocks like oil, banking, industrials and materials all rose. Bank stocks are pricing in an expanded yield curve in the past week, but a yield curve that is vulnerable, as the new debt issuance is over now. Banks have underperformed the broader market since late June.
Negatively, retail sales came in at a 1.2% year-over-year increase for July, against economists' estimates of 2% and lower than June's reading of up 8.4%. This is mixed with strong data on the jobs front Thursday. The speed of the economic recovery has been strong, but choppy in the past few months.
Making matters worse, Congress is on break until September, which means the much-needed new round of fiscal stimulus won’t come in until at least September. Meanwhile, states have paused reopenings, interest rates cannot fall much from here and small businesses are in need of liquidity. The speed of the economic recovery is now in question and this week was a choppy one for stocks.
Here’s what Wall Street’s saying:
Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank:
“Standstill fiscal talks in the US limited the appetite for more equity purchases [in the morning].”
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"What did we learn this week? First, we were reminded this week that policy makers often have a very different view of what the word “immediate” means than do market participants. The thing that amazes me about this is that those of us in the markets are always surprised by this difference. For those of us in the markets, “immediate” means it should have been done yesterday; while for legislators, “immediate” could mean months from now, and in the case of a Phase IV stimulus bill, it definitely indicates after Labor Day at the earliest. I believe constituents will be angry at their political representatives, and expect when legislators return from their break, a new round of subsidy checks will be passed, with some extra funding for a few special programs to make it more palatable for the holdouts to vote in agreement. Will this be timely enough to keep the recovery on a very sound footing?
Team, Bank of America Global Research:
"Stocks, consumers, China, inflation all putting upward pressure on bond yields - which is what ends bull markets. Strong recovery in world's 2nd largest economy [China] boosts BofA Global EPS [earnings per share] model."
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