Stocks surged Monday as investors saw plenty of reason for optimism on a fast economic recovery from the coronavirus-induced recession.
All three major U.S. indices rose, with the S&P 500 up 3.15% and the Dow up 3.9%, or 911 points higher. The 10-Year Treasury yield rose to 0.73% from 0.65%. Yields rise as prices fall.
The average stock on the S&P 500 now trades at 18 times 2021 earnings estimates, a high valuation even for earnings projections one year out in a normal environment. Generally low rates are a large part of this.
Driving the optimism was comments from Federal Reserve Chairman Jerome Powell, who told CBS’ 60 Minutes that the economic recovery could be fast and that GDP growth could be positive in the third quarter. For reference, many strategists see third-quarter GDP merely moving back towards positive growth, but not getting to that point — and stocks have moved up on that hope.
The market looked right past U.S.-China headwinds despite. China has said it will place restrictions on Apple (AAPL) - Get Apple Inc. Report and Boeing’s (BA) - Get The Boeing Company Report ability to do business in China. Still, both stocks rose 2.3% and 12.8%, respectively. Apple is slowly reopening stores in the U.S.
The U.S. also wants to restrict its own semiconductor manufacturers from selling chips to Huawei, China’s premier tech giant, in order to protect American software and intellectual property. The iShares PHLX Semiconductor ETF (SOXX) - Get iShares Semiconductor ETF Report rose 4.59%, as Huawei’s chip purchases only account for roughly 5% of the global semiconductor market.
Elsewhere, a bullish signal for the market has recently cropped up. Banks and small caps are outperforming.
The Invesco KBW bank ETF (KBWB) - Get Invesco KBW Bank ETF Report rose 7.9% and is up 10.5% since May 13, against the S&P 500’s gain of 4.7%. Low rates are spurring high loan volumes for the moment, but also spreads on long-term interest rates over short-term are rising. That’s a positive for banks’ net interest margins, or the percent of interest income they keep after paying interest to depositors and lenders.
Small caps are also rising, with the Russell 2000 rising 6% Monday. Small caps can be highly economically sensitive and highly volatile.
Here’s what wall Street’s saying:
Matthew Harrison, Head, Biotechnology Research, Morgan Stanley:
"Reopening states continue to have a flat or upward trajectory in new cases.”
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
“Market breadth is improving and some key early cyclical sectors are starting to lead. [The] Classic Early rotation since the March has begun.”
Mike Ryan, Chief Investment Officer, Americas, UBS:
"It's long been understood that the restart of the global economy would be a staggered affair, with a phased approach tailored to each region’s needs. Since every state, city, and county has a different demographic, geographic, social, and commercial profile, a "one size fits all” restart process was never really going to work. a phased recovery process highlights the importance of diversification. By diversifying in stock markets across the globe, you can make sure that your portfolio includes an allocation to markets that reopen more quickly and manage "second wave” risks effectively—right now, China looks to have a head start on the rest of the globe, for example—while also reducing the risk that your portfolio is overexposed to countries that struggle to return to normal."
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
“Until an effective treatment/cure becomes widely available, the economy may be in for a bumpy ride and the path to recovery is far from certain. A sign of the uncertainty regarding the future path of the economy is on full display within economists’ estimates for this year.”
Lauren Goodwin, Economist, Multi-Asset Strategist, New York Life Investments:
"We’ve are continuing to watch for increases in U.S.-China tensions. We expect posturing against China to continue throughout this election year, which could present meaningful risks to investors.”
Jeff Buchbinder, Equity Strategist, LPL Financial:
“While we acknowledge valuations are high relative to historical trends, and a larger pullback would not surprise us over the near term, the market’s forward PE ratio using depressed 2020 earnings doesn’t worry us too much given the environment. Valuation fears may be exaggerated if we get a steady earnings recovery beginning later this year, as we expect. Also, currently low interest rates and low inflation have been associated with higher valuations historically, and valuations are not very good at predicting where stocks will go over the near term.”