Stocks were pressured, but held their ground Thursday, as economic and virus-related headwinds emerged. The general trend in the ongoing economic contraction is still improving, but valuations are stretched.
The S&P 500 rose 0.06% and the 10-Year Treasury yield slipped to 0.7%, a risk-off signal.
In the last two weeks, the S&P 500 has been basically flat, which includes a 5% drop on one day in that timespan. The average stock on the index now trades at almost 25 times earnings, a multiple that is unlikely to expand much from that level, given its historical correlation to interest rates.
So while the market pushed through some headwinds Thursday, it may take an even stronger dose of positive trends to push stocks higher in the near-term.
Jobless claims for the past week came in at 1.5 million, missing estimates of 1.3 million. The number was 1.5 million last week, so the direction wasn’t positive on a week-over-week basis, although the overall direction in the past few months is very positive. The first representative jobless read during quarantine was 6 million people.
On the coronavirus, John Hopkins data shows daily new cases trending at a 5-day moving average of 25,000, up from 23,000 Wednesday and 17,000 several weeks ago. Stocks have had a negative reaction to the data, which continue to worsen. But beliefs that Congress will do another round of fiscal stimulus this year and confidence that the Federal Reserve will continue to support all areas of the bond market is prevailing in the market currently. If states lockdown, that could mean economic data will worsen again and catalyze more selling in the market, but many believe a second market correction would be more benign than the bear market in the first quarter was.
Sector leadership was mixed Thursday, providing not much clarity on the market’s incremental change in its belief in a speedy economic recovery.
Cyclicals were mixed, as were defensives. Energy ETF (XLE) - Get Energy Select Sector SPDR Fund Report rose 1.26%. Bank ETF (KBWB) - Get Invesco KBW Bank ETF Report was flat. The S&P 500 Equal Weight Consumer Discretionary Index fell 0.53%.
But the New York Stock Exchange Healthcare Index also fell 0.52%. The S&P 500 Equal Weight Consumer Staples Index outperformed, up 0.4%. As the market avoided heavy losses, it did so without the help of big tech, which has a large market-cap weighting in the S&P 500. S&P 500 tech ETF XLK, while outperforming, rose just 0.51%.
United States Steel Company (X) - Get United States Steel Corporation Report did say it will post a wider net loss than initially expected in the second quarter, which is expected to represent the trough for the crisis for the company, as the virus dented demand. The company called out energy and automotive segments in particular as weak areas. The company will also issue new shares to raise capital. The stock fell 13%.
Here’s what Wall Street’s saying:
Matthew Harrison, Biotech Analyst, Morgan Stanley:
“We now track key countries for a potential second wave. In the United Sates, the trend and scope of new virus cases continues to be worse than other western countries. The peak is significantly flatter and wider than other countries and and our total predicted infections now stand at 2.7 million [from 1.3 million last month], all driven by the reopening of states. Many states are experiencing rising trends."
Peter Essele, Head, Portfolio Management, Commonwealth Financial Network:
"The initial claims numbers suggest we remain on the path to recovery. While the official release was larger than the survey estimate, the trajectory is the most important takeaway in this case. On a week-over-week basis, Google searches for “unemployment insurance” actually increased, something we haven’t seen since the latter part of March. As a result, the initial claims numbers should be looked at as a win in this instance. Markets have brushed off the announcement, and are starting the march higher once again as the Leading Economic Indicator index came in better than expected during early morning trading. The economic improvement we’re seeing is akin to a late-spring thaw that could turn into a full bloom by mid-summer.”
Michael Crook, Head, Americas Investment Strategy, UBS:
"For the most part, investors don't hedge most assets in their portfolio because the ongoing costs to maintain the protection will often outweigh the benefits. However, there are times when hedges make sense, though still probably only for a small portion of the entire portfolio. For most asset classes, now is not the time to purchase protection. The costs are exceptionally high for risky assets. Costs are staying this high because we are in a time of extreme uncertainty."
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