The S&P 500 fell 0.8%, dragged down by the tech-heavy Nasdaq’s loss of 1.69%. Bullishly, the 10-Year Treasury Yield rose to 0.64% from 0.58%. Yields rise when prices fall.
The Yield had hit 0.66% earlier in the day. That’s a strong move, signaling more confidence in economic demand and inflation, although fixed-income investors did tell TheStreet that an expected added supply of longer-dated treasury bonds, as the treasury department issues debt to finance the heavy fiscal stimulus, is putting some pressure on the price of the bonds. The yield, though, has been pressured of late, as general uncertainty on the economic and earnings recovery has weighed on it. Plus, the Federal Reserve may increase the size of its asset purchasing program if yields rise too much, another pressure point on yields.
As for tech, some strategists say big tech is in a bubble, a highly debated topic. That’s one reason tech stocks have fallen hard this week. The valuation gap between growth and value stocks has certainly widened, providing opportunity for value investors upon good news or catalysts.
Tuesday’s catalyst: Russia President Vladimir Putin said the country has developed the world’s first coronavirus vaccine. The global stock market tends to rally on any hint of positive vaccine news, even if there are caveats upon the initial news item. A Russian company is expected to produce the vaccine and Russia has approved, according to Reuters reports. But the drug hasn’t passed the final stage of trial. And by late afternoon Tuesday, experts had said the Phase 3 trial is essential.
Cyclical stocks like consumer discretionary, industrials, oil, banking and materials, which cannot cut through economic headwinds like big tech can, were rising explosively for most of the day. Banking rose about 4% at one point, as the yield curve expanded meaningfully. The Vanguard S&P 500 Value ETF (VOOV) - Get Vanguard S&P 500 Value ETF Report, also home to some low volatility defensive stocks as well as cyclicals, was up around 1%. By closing time, it had fallen 0.28%. Bank stocks ended the day up 2%.
While risk sentiment faded by the end of the day, the poor performance of U.S. biotech stocks does suggest that investors are taking the Russia news somewhat seriously. A global player distributing a COVID drug could easily lower the market share of other biotech companies in the running for a COVID vaccine. Regeneron (REGN) - Get Regeneron Pharmaceuticals, Inc. Report, Moderna (MRNA) - Get Moderna, Inc. Report and Pfizer (PFE) - Get Pfizer Inc. Report all fell 1.54%, 4.22% and 1.55% Tuesday, respectively.
Here’s what Wall Street’s saying:
Charles Ripley, Senior Investment Strategist, Allianz Investment Management to TheStreet:
"Any time they [investors] are going hear stuff about a vaccine, it spurs a risk on environment in the market. Overall, the biggest overhang we’ve had is the uncertainty over COVID. When we hear a headline, there’s always going to be a quick reaction at first until we learn more about this developing story.”
Market Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"The S&P 500 has reached a new all-time high on a total return basis [as of Tuesday morning]. Monday’s 0.3% gain took the S&P 500 beyond February’s record high in total return terms, and in price terms the index is now only 0.76% below that peak. The latest milestone for the index provides an opportunity to reassess the outlook. In our central scenario, we expect no renewed nationwide lockdowns. Moderate restrictions on activity should be sufficient to keep outbreaks manageable, with a vaccine widely available from 2Q 2021. This, combined with expansionary monetary policy and a moderate increase in fiscal stimulus, should allow for a rebound of economic activity to pre-pandemic levels by 2022. Against this backdrop, and with yields anchored close to record low levels, we think that the equity risk premium can normalize to pre-pandemic levels, and we would project the S&P 500 to trade at 3,500 by end-June 2021.”
Brad McMillan, Chief Investment Officer, Commonwealth Financial Network:
"The S&P is now touching record highs, and is back to the levels we saw before the pandemic. With the second wave of the virus coming under control, and jobs and spending continuing to recover faster than expected, corporate earnings have come in above expectations and appear on track to get back to pre-pandemic levels ahead of schedule. This combined with the unprecedented fiscal stimulus and low interest rates is what has brought back – and what might well take it even higher in the third quarter.”
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