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Stocks Rise in Defensive Rally: What Wall Street's Saying

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Stocks rose Friday as the White House recommended to Congress a hefty fiscal stimulus bill. Still, the rally was slanted to defensive assets, suggesting some momentary preference to shut away from assets that perform when the economy does the same.

The S&P 500 rose 0.88%, with the held of big tech, as the Nasdaq rose 139%. The 10-Year Treasury yield was pressured, down a tick to 0.77%. Yields fall when prices rise. The price of crude oil fell 1.63%.

The $1.8 trillion stimulus proposal to progress not only seems sufficient for small businesses not fully reopened to receive free cash to retain employees and remain operational, but it only indicates the White House is indeed more than willing to work with Congress on getting a bill out soon. This would play a major role in the continuation of the V-shaped economic recovery and would enable stocks to continue to price in earnings momentum over the coming quarters.

Growth stocks outperformed value Friday, as investors, currently comfortable paying relatively elevated multiples for growth, enjoy premium earnings growth in the near-term from FAANG stocks and some semiconductor stocks exposed to 5G device sales and clout and data center spend. These companies have the ability to generate relatively high earnings growth even if economic headwinds take hold.

Still, the Vanguard S&P 500 Value ETF  (VOOV) - Get Vanguard S&P 500 Value ETF Report rose 0.26% and while cyclical sectors performed roughly in line with that move, it was defensive stocks, which can enjoy a solid earnings stream even through economic turbulence, that shined in the value class of stocks. Large cap consumer staples rose 0.42%. The NYSE Healthcare Index rose 0.9%.

Investors generally are accepting the V-shaped recovery as ongoing, but have been positioning somewhat defensively. Not only does a potential ballot-counting issue mean potential near-term volatility, but more lockdowns on account of another wave of virus infections would put businesses and consumers in a position to cut spending on highly cyclical areas like discretionary goods, oil and new manufacturing plants.

Bank of America Global Research said investors this week put roughly $20 billion into bond funds and withdrew more than $2 billion from stocks.

Here’s what Wall Street’s saying:

Lauren Goodwin, Economist, Multi-Asset Portfolio Strategist, New York Life Investments:

"The easy part of the economic rebound is over. The remaining recovery is likely to be much more challenging.Employment growth faces headwinds for the next several months as large firms announce layoffs and small businesses continue to shut their doors. This will create a drag on economic growth and inflation, and contribute to the “winners and losers” dynamic of the COVID recovery. Looking forward, a worse-than-expected economic recovery will drive market volatility and uncertainty around the path of policy. By contrast, a better-than-expected economic recovery will increase the likelihood that liquidity questions (Fed tapering) comes into play. The biggest risk for the economy is that policymakers allow the measures that have kept activity intact to wane too early. Exposure to value and cyclicals should be considered a hedge against unexpectedly reflationary outcome, likely driven by better-than-expected virus outcomes, not as a structural position.”

Lindsey Bell, Chief Investment Strategist, Ally Invest:

"Consumers are spending like COVID never happened, and retail sales have fully recovered after falling off a cliff in March. Retail sales have fully recovered after falling off a cliff in March, and consumer confidence is increasing at the fastest pace since 2003. But the spending spree is uneven, as the pandemic has deprioritized items like cars and clothing. The economy’s growing, but early signs of weakness are surfacing. Our recommended treatment is more fiscal aid to help struggling small businesses, pandemic-prone sectors, and unemployed consumers. Unfortunately, Congress and the White House are still in a stalemate, and we may be in for some year-end economic struggles that could give the stock market some trouble. Overall, we still remain optimistic about the market in the long-term.”

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

“Ways to add yield to your portfolio. Emerging market USD sovereign bonds. With a yield of 5%, these offer attractive carry potential, and over the last three months they have. delivered a 2.3% return. It is also worth noting that the JP Morgan Index of emerging market bonds has over 70 issuers in it, making it more resistant to the risk of an idiosyncratic shock. We think spreads will tighten to 360bps by June 2021 from 411bps currently."

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