Stocks Rise in Bifurcated Market: What Wall Street's Saying

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Stocks rose modestly Friday, but risk sentiment was not very strong. Wall Street is highlighting the need for investors to exhibit some caution ahead.  

The S&P 500 rose 0.28%, with the 10-Year Treasury yield flat at 0.63%. It has been pressured all week, down a basis point. Yields fall when prices rise. The market rally was led by some sub-industries of the technology sector as well as healthcare, while classically cyclical sectors fell considerably. 

FANG stocks were down, as Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report was flying high into earnings, on which management said the explosive subscriber growth priced into the stock was a mere pull-forward of demand and that growth will slow. The stock fell 6.52%.

But large cap semiconductor stocks, which have both cyclical and growth qualities, were up 0.5%. The NYSE Healthcare Index, which contains many biotech and drug-making companies, rose 1.48%. Tech and healthcare have incredibly heavy weightings in the S&P 500, bringing the big index up. 

But cyclicals like oil, banking and consumer discretionary were down considerably. The S&P 500 Equal-Weight Consumer Discretionary Index fell 0.82%, while large cap oil and banks fell 1.4% and 2.4%, respectively. 

Recently, strong economic data have been met with forward-looking indicators that paint a dark picture, some of which is priced into the beaten-down cyclicals. Retail sales for June rose 7% year-over-year, aided by monetary and fiscal stimulus as layoffs had spiked in the past several months. But with the federal funds rate already at 0% and more fiscal stimulus needed — and Congress moving slowly — the outlook for cyclicals is uncertain. Friday morning, the July consumer sentiment reading came in at about 73, below the expected 78 and falling from June’s reading of 78. 

Consumers may be hesitant about spending, as daily new coronavirus cases are reaching new highs every few days in the U.S. They reached 72,000 Friday, according to Johns Hopkins data. States are pausing reopening plans, potentially stoking fear in households.

Meanwhile, large banks mostly did beat revenue and earnings estimates, as the somewhat volatile trading and investment banking segments carried the banks, while net interest margins and income fell hard. But loan loss provisions—cash banks set aside to absorb potential credit losses—largely came in worse-than-expected, totaling $30 billion. That’s a signal that banks are concerned with the health of the consumer going forward, which some commercial banking executives TheStreet has spoken with have confirmed of late. 

Here’s what Wall Street’s saying: 

Charlie Ripley, Senior Investment Strategist, Allianz Investment Management: 

“The preliminary reading on consumer attitudes for July slipped as the University of Michigan’s index on consumer sentiment declined to 73.2 from 78.1. It’s likely that the increase of virus cases across the U.S. has weighed on sentiment. Recently, Fed members have discussed the fragility of the current economic recovery and the latest data on consumer sentiment underscores that view. We think the disappointing consumer sentiment data provides additional evidence for Congress to act on another round of fiscal stimulus.” 

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

“Wave 13 of our 2,000 U.S. consumer shows increasing virus concerns, particularly where cases are rising quickly. Uncertainty in the economy is up, but personal outlooks are stable. Out of home dining is falling but delivery intentions are rising. Home improvement intent remains strong.” 

Steve Foley, Head, Corporate Banking, TD Bank to TheStreet:

"There’s still a lot of uncertainty and lack of visibility going forward. That really just stymies growth and business investment. As it related to the outlook for the loan market, [banks are] very focused on the short end of the market. Banks are looking to extend for shorter terms just to get them [companies] through. A foggy market has been a staple.” [the long-term loan market] has not been there right now.” 

Lindsey Bell, Chief Investment Strategist, Ally Invest:

"Something is making investors feel nervous, even though the stock market isn’t exactly reflecting it yet. It could be second-quarter earnings season, which is expected to be corporate America’s worst results since the fourth quarter of 2008. We’re less than a month away from Congress deciding on more fiscal stimulus, including enhanced unemployment benefits. Coronavirus hotspots are getting worse, and parts of the economy are closing down again. Technology stocks, which have led the market higher for most of this recovery, seem to be taking a breather.”

RBC Capital Markerts Equity Research Team on Drug Pricing & Healthcare:

"RBC's healthcare and equity strategy teams had an opportunity to speak with a healthcare policy expert, to get the latest views from D.C. on policy developments related to healthcare, including drug pricing and hospitals in particular, expected areas of focus in 2H20 into and through the election, and potential ramifications of the Presidential and Congressional election outcomes on the space. We came out confident that in the very near-term, meaningful action or rhetoric on drug pricing is unlikely as the country grapples with COVID-19 and higher-priority areas dominate political focus, though regardless of the election outcome (and particularly if Democrats take control of the Senate), we are likely to see greater action next year. On hospitals, we believe the significant goodwill generated in recent months will continue to favorably influence politics. Overall we continue to see the healthcare sector favorably, see perhaps limited downside with either presidential outcome and would continue to be overweight on the sector heading into the back half of the year."

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