Stocks Surge on Cocktail of Tailwinds: What Wall Street’s Saying

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Stocks rose considerably Monday on 3 clear tailwinds. Meanwhile, interest rates are beginning to rise along with the recent economic bullishness, causing some near-term concern for some on Wall Street. 

All three major U.S. indices rose, with the S&P 500 up 1.2%. The index is now at a gain of les than a percent for the year and still 4.8% below its all-time-high. The safe 10-Year Treasury bond saw its yield fall to 0.88% from the bullish 0.91% it hit after Friday’s strong jobs report. Yield rise when prices fall. The yield had sat at around 0.7% for weeks, before surging. The higher yield indicates economic bullishness, which was partially spurred by low interest rates, making another potential leg higher in the yield a risk to stocks.

One major tailwind was that OPEC agreed to expend its oil protein cut deal to cutting 9.6 million barrels per day. In May, OPEC cut production by 9.7 million barrels per day. Crude oil, which has been on a tear since prices went negative for a day, fell 3.3% to $38 a barrel. But the economic bullishness and generally higher oil price is a huge positive for the profitability of oil companies. The Energy Select Sector SPDR ETF  (XLE) - Get Report rose 4.5%. 

Tailwind number two was New York State initiating phase one of its reopening process. 

Also, Bloomberg reported that Astrazeneca  (AZN) - Get Report approached Gilead Sciences  (GILD) - Get Report about merger. Neither side has confirmed ongoing talks currently. 

The deal would create a $170 billion — potentially more when accounting for synergies biotech giant — that could possibly create a virus vaccine efficiently and sell it at scale. Still, Gilead only rose 0.29%, which could simply be a response to a solid run earlier in the year, or it could indicate the market isn’t si sure of the merger, which would mean the potential deal may not have been the most important tailwind for stocks Monday. 

Overall, value has continued to outperform growth, a trend that began about a month ago. Many value stocks are cyclical, so the market is indicating economic bullishness. 

With the S&P 500 up 44% since its bear market low March 23, The Vanguard S&P 500 Value ETF  (VOOV) - Get Report is up 45%, with its growth counterpart  (VOOG) - Get Report up 44%. 

Value had underperformed growth in the bull market that started with the market bottom in 2009 and ended with the virus in 2020. But if stronger inflation and GDP growth is part of the picture going forward, especially as monetary and fiscal stimulus has been ever present this year, value could participate in up-markets more going forward. Some still think powerful growth stocks, which the U.S. is home to many of, will continue to dominate. 

Boosting growth and the Nasdaq (+1) was Amazon  (AMZN) - Get Report, up 1.8% on the day. RBC Capital Markets boosted its price target on the stock, saying the Coronavirus tailwind is creating a potentially sustainable accelerated consumer move into e-commerce , bringing revenue and earnings estimates even higher than previously anticipated. 

On the broader market, here’s what Wall Street’s saying:

Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:

“The kind of rise in yields suggested by our cyclical/defensive ratio would qualify as sharp. If rates quickly catch up to cyclicals, I believe it could be temporarily negative for equity indices as valuations come under pressure. Such a re-rating would likely be most damaging to the bond-proxies and longest-duration parts of the equity market — i.e. high multiple stocks — which make up a large percentage of the index. However, after a period of adjustment, a move higher in rates should ultimately be interpreted as another sign of better growth to come. Bottom line, equity markets have been telling us growth is going to surprise on the upside. Rates markets have lagged but could catch up quickly. A sudden, sharp move would likely cause a correction in the equity market, but I’d view it as just a bump in the road of this new bull market and an opportunity to add to risk, especially in the more economically sensitive areas that have been leading.” 

Tony Dwyer, Chief Market Strategist, Canaccord Genuity:

"On May 26, we adopted an offensive position due to (1) the continued improvement in our key credit metrics, (2) rotation into the areas that benefit from an economic reopening, and (3) the S&P 500 (SPX) breakout from the trading range that began following the initial relief rally off the panic low. The S&P 500 has rallied over 7% and surpassed our short-term tactical breakout target of 3,150. The sectors that have led the move higher since the breakout have seen an incredible move that could lead to some consolidation:

• KBW Bank Stock Index (BKX) is up 30%

• S&P Industrial Sector (Tanks) is up 18%

• Equal weighted Consumer Discretion that takes out Amazon effect is up 20%

• Russell 1000 Value (RLV) is up 12%.” 

Team, Columbia Threadneedle Investments: 

"Various equity market indicators continue to suggest caution. Our proprietary adaptive market state analysis has improved from its defensive state into a more typical “neutral” state. But we’re observing a mosaic of other indicators that supports a cautious stance. There are two reasons that we believe fixed-income markets are attractive relative to equity: First, there are potential diversification benefits of duration assets in an equity correction. Second, we continue to believe credit markets are best suited to benefit from the generous fiscal support policies that have been introduced.” 

Lori Calvasina, Head, U.S. Equity Strategy, RBC Capital Markets:

"Consumer sentiment has been surprisingly resilient and has started to stabilize. Over time, the link between the sentiment of the US consumer and equity returns has grown as the US economy has transformed itself into a consumer-led economy. Many Americans have viewed job losses as temporary. Aside from Rhode Island and Connecticut, most of the states that are seeing improvements in restaurant bookings are located in the South and West."

Alexandra Walvis, Consumer Analyst, Goldman Sachs:

“Early indicators of reopening have been better than feared."

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