Stocks rose Wednesday in a mostly risk-on day, with one caveat and some tepidness detected in the equity market.
The S&P 500 rose 2.01%, aided by the gain of the large cap tech components on the Nasdaq, which rose 2.71%. The 10-Year Treasury yield also expanded to 0.7%. yields rise when prices fall.
Tech stocks had entered correction territory after SoftBank and its brokers had bid up those stocks substantially, even after an impressive ride up baed on strong fundamentals. But valuations got overstretched last week and, while investors are buying the dip on stocks like Apple AAPL — up as much as 4% Wednesday — some wonder if a broader rerating of valuations is underway. COVID-driven demand for secular growth trends like e-commerce, streaming and cloud may have pulled forward demand massively from out-years in valuations. Slack WORK, after having risen into earnings, beat estimates and raised guidance, but reported decelerating growth in items like billings. The stock fell 13.88%.
Value stocks, though, had a strong day as well. Large cap consumer discretionary rose, in aggregate, 0.49%, checks from consumer stock analysts and earnings from retailers show a continued sharp rebound in consumer spending. But some consumer discretionary stocks like a few restaurants, department stores and all major airlines fell 1% to 2%. The fiscal stimulus bill, in its current form, is only $500 billion compared to prior bills this year in the trillions. There would be no household checks and unemployment benefits cut in half. Those were key ingredients to the rebound i consumer spend earlier in the year, although the unemployment has also fallen fiercely to 8.4% from above 15% just a few months ago. Digitally savvy companies are seeing the most strength. Starbucks SBUX rose 0.53%.
But with investors buying dips — and valuations for large cap value have compressed as well as of the last week of trading — the market was in a good mood Wednesday. Oil, banking and manufacturing stocks rose considerably. The Vanguard S&P 500 Value ETF VOOV rose 1.16%.
Here’s what Wall Street's Saying:
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance:
"As long as the buy-the-dips mentality remains foremost in investors’ minds – and it will unless they are severely punished for it – then the bull market is likely to continue."
Dan Ives, Tech Analyst, Wedbush Securities:
"Last night Slack delivered good, but overall mixed results for its FY2Q (July) with the Street and bulls expecting much more upside. While top-line results beat the Street and grew impressively ~50% YoY, the main focus of investors this morning will be Slack's billings miss with the company surprisingly missing expectations which will be a shock to the bulls anticipating a clean beat. It appears elevated churn and overall macro softness impacted the company's results, although Slack Connect is showing some signs of acceleration and is a clear positive looking ahead. With Slack being one of the poster childs for the work-from-home trend and the stock reflecting that optimism, last night's results/guidance will be viewed as disappointing to those investors expecting a blowout quarter. In our opinion, with Microsoft Teams aggressively looking to court its unparalleled installed base of customers this remains the main competitive threat to Slack as they further penetrate through the enterprise ecosystem looking ahead.”
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"A key tenet of our macroeconomic outlook and constructive view of the equity markets is our call for a gradual steepening of the curve over the balance of this year and through the first six months of 2021. Specifically, we expect the yield on the 10-year Treasury to rise to 1% before year-end and climb toward 1.5% by the June next year. This projected backup in rates is seen principally as a result of rising real rates even as the Fed Funds rate is seen stuck at near zero through the end of 2021 and beyond. This gradual rise in real rates is expected to result from growing acceptance that the economy is on a sustainable recovery/expansion trajectory, as the risk of a renewed lockdown recedes even without a vaccine. There has clearly been a substantial risk premium built into the long-end of the curve since the Covid-19 problem began. This risk premium is reflected in the persistent, if negative, real yields on long-dated TIPS. As confidence in the sustainability of the recover increases with additional gains in employment as more of the economy reopens, this premium should gradually diminish. Continued weakness in the currency adds to our curve steepening call, as it provides a measure of immunity from global deflationary pressures which should help the Fed achieve its 2% inflation target over time."
Burt White, Chief Investment Officer, LPL Financial:
"Even in a falling rate period there are lessons from the last cycle about rising rates. Among them: Careful when the Fed stops buying and sometimes the best defense is a good offense. The two drivers of rising rates last cycle were economic growth and Fed bond purchases, also known as quantitative easing (QE). The Fed buys bonds to keep rates down, but the start of Fed buying has actually been the time when rates rise—likely on expectations that the purchases would help strengthen the economy. These periods also often followed large rate declines either because markets anticipated the start of Fed buying or the economy was faltering. The takeaway: unless the economy is really taking off, any rising-rate period may pause for an extended period, or even reverse, when the Fed backs off bond purchases."