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Why Stocks Rose Friday Without Stimulus Deal

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Stocks rose Friday, even as it becomes increasingly clear the U.S. will not have fiscal stimulus deal in the very near-term. Importantly, tech lead the rally. 

The S&P 500 rose 0.25%, as cyclical sectors rose, but lagged the tech-heavy Nasdaq, which rose 0.55%. The 10-Year treasury yield, which had a substantial run-up this week, fell to 0.72%. Yields fall when prices rise. 

Negatively, House Speaker Nancy Pelosi said Congress is completely at an impasse on a coronavirus relief package. Congress is adjourned for the summer, while small businesses in states that have halted reopening plans need cash. More delays on fiscal stimulus — while the federal funds rate of 0% cannot fall much from here — could slow the pace of the currently fast recovery. 

Still, cyclical stocks — economically sensitive ones — rose a bit. Consumer discretionary was mostly up with airlines up about 0.5%. Oil rose a touch, a few tenths of a percentage point, as did many large cap banks like Bank of America  (BAC) - Get Free Report, which had a particularly strong week as the yield curve expanded, partly a product of the Federal Reserve’s new highly inflationary policy. 

Although the fiscal stimulus picture looks bleak at present, consumer spend for July did come in at 1.9%, beating estimates of 1.6%. The previous reading was a 5% increase, representing pent-up demand and cash grants to households from the government. This is a strong pace of spend, a pace that hinges somewhat on fiscal stimulus for the near-term. Although consumer discretionary stocks were performing nicely before the consumer spending data came out, the data still supports sentiment. 

More generally, value stocks have been trying to keep up with growth stocks. Valuation levels for value have, at times this year, been disproportional lower than those of growth stocks compared to where the difference can sit. Investors have been trying to assess whether growth or value deserves a larger portion of one’s portfolio, as threats to the economic and earnings recovery can keep value stocks at their relatively low levels. Friday, there was more outperformance from growth. 

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