Wednesday's Stock Rally Wasn't About Economic Optimism: What Wall Street's Saying

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Stocks rose Wednesday, led by big tech stocks, while cyclical sectors fell. Wall Street remains focused on a second-half recovery.

The S&P 500 rose 0.5%, buoyed by the tech-heavy Nasdaq rising 0.95%. Even though economically-sensitive sectors largely performed poorly, the 10-Year Treasury yield rose to 0.68%. Yields rise when prices fall. 

The ADP jobs report showed a June jobs gain of a bit under 3 million, missing economists' estimates of 3.5 million. The ISM manufacturing index rose year-over-year with a reading of 52 (above 50 represents growth), beating estimates of 50 and improving over May's contraction of 43. 

The economic data have trended in a positive direction since the beginning of April, although the improvements have largely stalled in the past few weeks, giving investors pause on cyclical sectors of the economy. And Wednesday, cyclical sectors like oil, banking, consumer discretionary and industrials were all pressured, falling between a few tenths of a percentage point and more than 2%. 

Bringing the S&P 500 up were large-cap tech stocks, which have an outsized market cap weighing in the index. The NYSE FANG index rose 2.86%. Apple  (AAPL) - Get Apple Inc. (AAPL) Report rose for most of the day, even as news has trickled out that the company is seeing slightly weaker 5G demand than previously expected, although the company has now urged suppliers to ramp up production. Apple shares ended the day down 0.19% as it is re-closing 30 stores due to the coronavirus. 

Paused reopenings are becoming a theme—though full lockdowns are not—as coronavirus cases continue surging in the U.S. And monetary stimulus remains ongoing, while investors hope for more fiscal stimulus to inject fresh cash into the hands of households. Some on Wall Street do point out that, unless lockdowns become severe and widespread, the recovery may be somewhat unthreatened. 

Here’s what Wall Street’s saying: 

Ryan Detrick, Senior Market Strategist, LPL Financial:

"What a quarter the second quarter was, with the S&P 500 Index adding 20.0%, for the best quarter since 1998 and the best second quarter since 1938. Of course, stocks fell 20% in the first quarter, so what we really have is a bad case of whiplash in 2020 thus far. A 20% quarterly gain is quite rare, but the catch is previous large quarterly gains have actually led to continued strength. In fact, a quarter later stocks have been higher the past 8 times after gaining at least 15% during the previous quarter.”

Brad McMillan, Chief Investment Officer, Commonwealth Financial Network:

"The real question about the coronavirus for the rest of 2020 is not if there will be a second wave, but whether it will be large enough to derail the economic recovery underway. So far, it does not look like it will. As of late June, we are seeing significant second waves in several states, and rising case counts in many others. Although it is quite possible we will see lockdowns locally, a national shutdown looks unlikely, which should allow much of the recovery to continue. Although there are risks to that outlook, it remains the most probable case for the rest of the year. Despite the rising case counts, the economic reopening is making solid progress. Job reports so far have indicated the damage has peaked and many have returned to work, leading to a bottoming out and rebound in consumer confidence. Surprisingly strong consumer spending data has validated this, as consumers spend only when employed and confident. And, while business confidence remains low, it, too, has rebounded and shows signs of continued recovery."

Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS: 

"Economies around the world are now gradually reopening from their self-imposed lockdowns. To stimulate the recovery, central banks have reduced interest rates to zero or below, and embarked on unprecedented quantitative easing programs. In this environment, the challenge to find income is made even more pressing given we think central banks may be willing to allow for a period of moderately higher inflation (e.g. 2–5%) to manage debt burdens. We don't expect government bond yields to change materially from their current levels, posing a challenge for investors looking to earn income and manage portfolio volatility. In short, we believe cash and the safest bonds are likely to deliver negative real returns for the foreseeable future. Find and diversify sources of income. Investors will need to seek income from dividends and higher-yielding credits. The need to accept greater risk to earn income heightens the value of diversification and careful portfolio management, and investors may want to delegate this decision-making to a professional manager."

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