Stocks rose Tuesday in a fairly broad rally that did reflect some level of risk-aversion when it comes to the economic recovery.
The S&P 500 rose 1.05%, partially on the back of an up-move in big tech stocks, as the Nasdaq 100 rose 1.88%. The 10-Year Treasury yield rose marginally to 0.67%. Yields rise as prices fall. The price of crude oil rose 0.61% to $39 a barrel.
As for tech, investors were swooping in to pick up secular growth stocks with a long runway of solid earnings growth ahead, at lower multiples than they might ever see if big tech is to remain a structural outperformer in the U.S. stock market. Investors scour for these stocks especially when the economic environment is uncertain.
Beyond the inability of long-term treasury yields to rise past current levels, investors seemed not completely risk-on. Large cap oil stocks fell. Bank stocks fell considerably, even with the incrementally expanding yield curve, which is a positive for bank profitability. Banks are seeing solid inflows of deposits, usually a tailwind for loan volumes, but the inflows are outpacing loan demand, as unemployment remains elevated, according to analysts at Goldman Sachs. Plus, banks see a fairly negative consumer credit outlook and are tightening their belts on lending and sending cash reserves higher. This is pressuring near-term earnings estimates.
Some cyclicals, like consumer discretionary and manufacturing rose, though manufacturing was quite mixed. The Vanguard S&P 500 Value ETF (VOOV) - Get Vanguard S&P 500 Value ETF Report, which has underperformed growth this year as the speed of the economic recovery has veered at times into questionable territory this year, was up just 0.05%.
Federal Reserve Chairman Jerome Powell said in his formal opening statement for his Congressional testimony that the continued rapidity of the economic recovery hinges on more stimulus. The Fed has made clear that, with small businesses not fully opened, unemployment still at an elevated absolute level and interest rates already at rock-bottom levels, Congress must work with the Fed to appropriate more stimulus dollars to the economy. Political will in Congress, especially among Republicans, for more fiscal spending is waning, especially ahead of the election. Value stocks sold-off Monday and have had trouble gaining meaningful traction this month.
Here’s what Wall Street’s saying:
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"My view that the recovery/expansion which follows the initial bounce in the economy is likely to be as shallow, 2%-2.5%, as that which followed the financial crises. This scenario supported by the incoming macro data suggesting the economy reached an inflation [inflection] point in August when the expanded jobless benefits expired. The consensus forecast, in contrast, assumes the economy will experience relatively strong growth over the balance of this year and next with real growth only falling back below 3% in 2022. This clear divergence between our more conservative macro assessment and that of the consensus is even more striking given the unprecedented coordination among policy makers confronting the Covid-19 recession. This coordination in policy is unprecedented in the last 40-50 years as the stagflation of the mid-1970 led policy makers to generally work at cross purposes until very recently. Moreover, our recovery more shallow recovery scenario suggests a gradual but steady tightening in labor market conditions as the result of a renewed set back in the participation rate.”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"What drove the sell-off [Monday]? A number of factors drove the decline, including concerns over the renewed spread of the coronavirus in Europe, the prospect of increased US political frictions, and continuing US-China tensions. What should investors do? In our base case, we think equities will move higher over the medium term, thanks to the likely development of a successful vaccine, an end to election uncertainty, the passage of new US fiscal stimulus, and continued extraordinary global monetary support. However, the path to “more normal" is likely to be bumpy amid uncertainty over the coronavirus, the US political environment, and US-China tensions. We therefore expect volatility to persist over the balance of the year."
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