Stocks rose Friday in a clear risk-on rally. Vaccine developments were positive, but murky and the main driver of the rally is continued optimism on the economic recovery, which can maintain itself even if fiscal stimulus is not finalized before the election.
The S&P 500 rose 0.34% on the strength of a broad sector rally. Growth tech stocks, less correlated to changes in the economy, were not doing most of the leg work, as the Nasdaq 100 rose just 0.25%. The 10-Year Treasury yield fell a tick to 0.84%, taking a breather from a run-up in the past month from 0.66%.
Positively, Gilead Sciences (GILD) - Get Report announced the Food and Drug Administration has approved its remdesivir coronavirus treatment for use. The stock initially rose 4%, before ending the day up 0.2%. An effective treatment makes reopenings more tolerable, but vaccines could unlock fully normalized economic activity.
Moderna (MRNA) - Get Report said its phase three trial for its coronavirus vaccine is moving along, as the company enrolls thousands of patients. The stock rose as much as 1.5% before falling 0.44%. Biotech analysts at Morgan Stanley say several questions regarding the efficacy of tests remain. The authorization would be emergency use. “The operation warp speed trials impose a higher bar for the primary efficacy endpoint,” wrote Morgan Stanley biotech analyst Matthew Harrison in a note. Moderna’s share price decline indicates the probability of its vaccine hitting the market in December did not move much higher Friday.
In the absence of fiscal stimulus for the time being, and with small businesses not fully reopened, widely distributed vaccines would act as its own economic stimulant. The economic recovery has been speedy all year but has slowed down as of late. Investors are generally confident that the next year or so will see a return to normalized economic activity.
Elsewhere, the purchasing manger’s index data showed a reading of above 50. Anything above 50 represents year-over-year growth in economic activity. Large cap industrials rose 0.53%.
Overall, cyclical stocks fared very well Friday. Large cap consumer discretionary stocks rose 1.2%. Bank stocks rose 0.73% as the yield curve has, over the past month, expanded aggressively, a major positive for bank profitability.
Still, the S&P 500 is down 2.5% for the week. Vice President Biden, who promises heavy fiscal spending (important for the economic recovery), has seen his lead in the polls over President Trump fall to 8 percentage points from 10. It is not entirely clear that the market is ‘pro-trump’ or ‘pro-Biden,’ but markets are receptive to Biden’s preference for fiscal spending.
Another factor holding stocks back is that the run-up in bond yields makes stocks incrementally less attractive, a negative that is weighed against the positive of the strengthening economic fundamentals the bond market reflects.
Here’s what Wall Street’s saying:
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
“With ten vaccine candidates in late-stage trials globally and following encouraging early data, we remain confident that a vaccine will be widely available by 2Q21. We think that an end to US political uncertainty, combined with the passage of further US fiscal stimulus and sustainable improvements in mobility on the back of vaccine progress, will support the next leg of the equity rally over the medium term.”
Ken Berman, Strategist, Gorilla Trades:
"The stimulus talks also continue to give headaches for bulls, as despite the deteriorating COVID picture, the talks still haven’t yielded an agreement. In economic news, the Markit manufacturing PMI missed expectations by a hair, but the key services PMI blew away the consensus estimate with a reading of 56 and both indicators continue to signal healthy growth."
Nigel Green, CEO, deVere Group:
"The massive extra stimulus of up to $3trn wanted by Democrats in January would buoy the markets and would have investors think about a broader-based economic recovery – rather than a narrower, tech-heavy one. Cyclical stocks are likely to outperform on the back of this fiscal stimulus and the inflationary expectations.”
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