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Stocks Fly High: What Wall Street's Saying

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It was pretty straightforward Friday. Tech stocks surged as investors bought the dip and value stocks rose sharply on hopes for more fiscal stimulus.

The S&P 500 rose 1.6%, partially aided by big tech, but also on the strength of every sector. The Nasdaq 100, home to some of the largest and most powerful tech stocks in the world, rose 2.26%.

The 10-Year Treasury yield cannot seem to move higher, which would indicate expectations of higher inflation. The yield is down to 0.66% from 0.68% earlier this week, even though the yield is below the expected rate of inflation. The Federal Reserve’s quantitative easing program has been so powerful and inflation expectations are so muted, there is a place for treasuries in the portfolios of some investors. The yield remaining low is supportive of stock valuations, but reflective of weak economic expectations, which would likely offset the ongoing positive impact on stocks from the low rates.

In tech, the Nasdaq 100 fell as much as 13% between September 2 and the morning of September 24, as investors have re-rated valuations for big names that sell service conducive to the at-home environment. Now, investors are buying the dip, with the index up about 2.5% since Thursday morning. Some are worried that, if demand for these services has been pulled forward from later years, ongoing valuation compression could offset strong earnings momentum and potentially bring the era of growth outperformance in the U.S. to a close. But Friday’s move in tech stocks was powerful.

And value stocks, which investors tend to favor when the economy is heating up, didn’t rise a sharply as tech did, although growth tech provides a tall task for value. The S&P 500 Value ETF  (VOOV) - Get Vanguard S&P 500 Value ETF Report rose 1.1%, with all sectors in the green for the day.

What’s spurring the bullishness Friday: Congress seems to be moving to pass a fiscal stimulus bill of more than $2 trillion, a surprise, given expectations for $1 trillion or less. 

Democrats are drafting the bill. Some reports say the bill could include stimulus checks to households, which already proved earlier in the year to boost consumer spend. Still, it remains to be seen whether Republicans, less willing to spend currently, will agree. A bill, though, would be a major factor enabling the V-shaped economic and earnings recovery to continue as such.

Also positively, Novavax  (NVAX) - Get Novavax, Inc. Report rose 10.86% after it said its coronavirus vaccine candidate began its late stage trials in the United Kingdom. This could indeed be key. If the virus continues to rage for the next several months to a year, the economy may need aggressive fiscal spending. But even if Congress and the White House experience a Blue Wave, it is unlikely the Democrats will control Congress by a wide margin and it would only take a few centrist Democrats to curb spending ambitions. A vaccine to get people out and keep businesses open could be a cure to the economy’s current disease.

These factors have been holding stocks back — the selling across sectors only abated meaningfully Friday. In the morning, most cyclical stocks were down. And surveys from macro strategists show investors are slightly bearish on the near-term outlook for stocks.

Here’s what Wall Street’s saying:

Michael Hartnett, Chief Investment Strategist, Bank of America Securities:

“[The] Epic Q2/Q3 surge on Wall St [was] driven (in order of impact) by policy stimulus, bearish positioning, improving pandemic and profits; Q3 returns have followed historical script…stocks and credit keep rallying (high single digit) after all-time great quarter; and in the next quarter (Q4'20) history predicts Nasdaq -4%, SPX flat. September correction is part of "topping process" but we don't expect [a] big bear move when Fed [policy is] so easy, Wall Street [is] flush with cash, vaccine expectations [are] strong; upside risks taking SPX back into 3300-3600 range are passage of phase 5 fiscal stimulus and strong 3Q tech earnings.”

Ken Berman, Strategist, Gorilla Trades:

“Cyclical assets continue to experience bouts of selling due to the growing global economic worries."

Team, Global Wealth Management, UBS:

"The enhanced unemployment benefits from the CARES Act of USD 600 per week expired on 31 July. We had expected political pressure to compel Congress to reach a compromise to provide another round of fiscal stimulus before Election Day. Those pleas for additional aid thus far have gone unanswered, overshadowed by the legislative gridlock that often accompanies the final weeks of a presidential election campaign. While a bipartisan group of lawmakers has introduced a bill to appropriate funds for another round of fiscal stimulus, leadership on both sides of the aisle appear reluctant to proceed. The next best opportunity for more federal aid may be the lame-duck session of Congress when it convenes in December.” 

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