Stocks Rise, Investors Cautious as Stimulus Hopes Are Tempered

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Stocks rose Monday in a rally with features suggesting investors were taking a slightly defensive tilt.

The S&P 500 rose 0.78%, a gain aided by the large cap tech components of the Nasdaq, which rose 1.3%. The 10-Year Treasury yield was flat at 0.78%. The price of crude oil fell 1.50% to just under $40 a barrel.

Nancy Pelosi and some Senate Republicans reportedly rejected the White House fiscal stimulus proposal, which called for $1.8 trillion and may have included checks to households and cash to small businesses. Many believe fiscal stimulus is a key ingredient to the V-shaped economic and earnings recovery, which wold support stocks at current prices. Small businesses are largely not full reopened and need cash to retain employees. Many unemployed Americans also need cash in order to keep spending.

Banks were rising a few tenths of a percentage point, lead by investment banks, whose businesses are less sensitive to changes in the yield curve and can rely on fee-based capital markets businesses such as trading and investment banking. Oil and airline stocks fell a bit more than 1% in aggregate, while consumer discretionary was mixed.

"We enter the week with the market near its all time high and still in the green for 2020, but also matched with an elevated VIX, or fear index, suggesting the market isn’t entirely settled when it comes to the election and its aftermath,” wrote Chris Larkin, Managing Director of Trading and Investment Product for E*Trade in emailed remarks to reporters. "The stimulus stalemate still looms large, though it failed to derail the market last week.”

"Cyclicals have garnered more attention despite fiscal concerns,” wrote Mike Wilson, chief U.S. equity strategist at Morgan Stanley in a note. "Amid growing speculation of a potential Democratic sweep and possibly greater fiscal stimulus than under other outcomes, cyclicals are gaining interest. At this point, clients are focused on whether a size-able fiscal deal is now necessary for cyclicals to continue working and/or whether it matters if that deal potentially comes pre-election (still unlikely according to our policy strategy team) or after.” Economists at Morgan Stanley sees GDP growing 5.5% year-over-year in 2021 — supporting the V-shaped recovery view — with stimulus coming as late as 2021 and only at $1 trillion.

Investors do increasingly believe that without fiscal stimulus in the next few weeks, the economy can enjoy some momentum into a virus vaccine that can reopen the economy or fiscal stimulus deployed by either administration, whichever candidate wins the election. Still, cyclicals would get a bigger jolt if stimulus were to hit the economy now.

Investors also piled into large cap growth tech Monday, as those stocks are far less correlated to economic activity and can grow through economic pain.

Apple  (AAPL) - Get Report rose 3.5% to $121 a share. Not only is its iPhone 12 launch this week potential catalyst if consumers take to the new device, but the company is now shipping the devices from its 300 North America retail locations to consumers no more than 100 miles away from any location. United Parcel Service  (United Parcel Service)  is the delivery service and the stock rose 0.5%. In the stay-at-home era, this would support near-term hardware sales. 

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