Stocks Rise as Economic Data Overshadows Headwinds: What Wall Street’s Saying

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Stocks rose Monday as encouraging economic data outweighed several risks. 

All three major U.S. indices rose, with the S&P 500 up 0.38%. The safe 10-Year Treasury bond saw its yield rise to 0.67%. Yields rise when prices fall. 

After stocks started the day down, the market began to turn around 10 a.m. after ISM manufacturing data showed an improving trend, supporting the market's thesis that the economy has bottomed and is on track to recover in 2020. Manufacturing activity for May came in at a reading of 43.1. Anything below 50 is contractionary. The reading missed estimates of 44, but improved over April’s reading of 41.5. 

Construction spending for April came in a 2.9% year-over-year, handily beating estimates of -6.8%. Some home building stocks outperformed, with KB Home  (KBH) - Get KB Home Report up 2%. Steel makers, some of which supply construction companies, rose. Nucor  (NUE) - Get Nucor Corporation Report and United States Steel Corporation  (X) - Get United States Steel Corporation Report rose 0.43% and 5.22%, respectively. 

Banks and industrials also outperformed. 

Negatively, riots grabbed national headlines over the weekend, as protestors responded to the tragic killing of George Floyd at the hands of police officer Derek Chauvin. The riots in New York, Atlanta, Los Angeles, Chicago and other cities caused widespread destruction. 

Trade relations with China have also caused marginal market volatility of late, but have been a secondary market concern to reopenings, coronavirus cases, and the search for a vaccine. China canceled soybean purchases from the U.S., another negative signal on trade between the two countries. 

Stocks are now solidly pricing in a fast economic recovery. Valuations have soared. The equity is premium—the excess rate of expected one-year earnings return on stocks minus the 10-Year Treasury yield—is at 3.5%. That’s an average risk premium historically and implies investors see a healthy economy in the near future. Accompanying this, positive technical indications are built into the market. But full valuations now leave the market vulnerable to developments that could threaten the recovery. 

Here’s what Wall Street’s saying: 

Lori Calvasina, Chief U.S. Equity Strategist, RBC Capital Markets: 

“The news flow took a different turn for the worse over the weekend, as protests erupted across the US in response to the death of George Floyd. Violence was reported in some instances, curfews were imposed in some cities, and the national guard was activated in a number of states. The S&P 500 has been reactive to news flow. In February and March, the S&P 500 fell sharply as bad news on the coronavirus and shuttering of the economy dominated headlines. In late March and April, the market rallied back driven by optimism on reopening and hope that stimulus would limit economic damage. After pausing in early May, when the possibility and wisdom of reopening were doubted, good news on vaccines re-ignited the rally (Exhibit 1). As June gets underway, the news flow appears to be deteriorating. Mass gatherings could spark concerns about a second wave of the virus.Consumer confidence could be pressured. The market may be focusing more on the China trade war because its implications for stocks are far easier to grasp and because these tensions were already building ahead of the weekend. S&P 500 stocks with higher exposure to China started to underperform in mid-May.” 

Michael Sheldon, Chief Investment Officer, RDM Financial Group:

“I’m pretty surprised the market hasn’t been more affected by everything that went on over the weekend. I think that the interpretations is that unless recent events affect the reopening of the economy and the recovery that is in the very early stages from continuing then the markets are at least for now willing to overlook the riots and the awful events from last week. It [impact of riots] could show up in consumer confidence, it could show up in a lack of rebound in consumer spending.” 

Shawn Cruz, Senior Trading Strategy Manager, TD Ameritrade:

"Unfortunately, many small business were likely already closed down to due restrictions in place. The bigger issue will be restoring the business and being ready to open once restrictions are lifted. It will be interesting to see what the impact is on insurers and reinsurers as well as banks that have lending exposure to these businesses.”

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