Stocks surged and risk sentiment was incredibly strong Monday.
The S&P 500 rose 1.8%, on the strength of not only big tech — the Nasdaq rose 2.32% — but also a powerful move from economically-sensitive areas of the market. The 10-Year Treasury yield rose to 0.77% from below 0.70%. The price of crude oil rose more than 6% to $39 a barrel.
Growth tech stocks, which are enjoying solid earnings momentum after a valuation-centric correction September, are outperforming.
For cyclical value stocks, a more general narrative is at play. Fiscal stimulus, which could certainly be on the way in the coming days, would add free money to household and businesses in need, while monetary stimulus — a key foundation to the recovery — is less able to move the needle on the economy the way it did earlier in 2020. Jobs, independent of stimulus, have been coming back at a fast pace, but may require more stimulus to continue that pace as businesses are still shut down.
Monday, the service purchasing managers index showed a reading of 57.8 in September, up a tick from the previous reading. Any reading above 50 indicates year-over-year growth. Retail, banks, hospitality businesses and other service companies are all seeing more business. Services comprise at least the slight majority of economic output in the U.S., making the PMI reading a meaningful one for the U.S. market.
Inflation expectations have been edging towards 1.7% from below 1%, a move driving money out of safe bonds and into risk assets, as inflation is associated with higher economic activity levels, better credit and an eroding value of a safe treasury bonds. Inflation also favors revenue growth for cyclical companies. And with real yields — treasury yields minus inflation — still negative, stocks still look fairly attractive to many investors.
Meanwhile, investor surveys from macro strategists show U.S. investors are growing more bullish on the stock market for the next year or so. RBC Capital Markets strategists say 50% of investors they recently surveyed are bullish, up from 42% in the second quarter.
Near-term risks to the economy and earnings - and the downside is deep — are lockdowns caused by a rise in virus infections, but investors are currently looking through that, as a vaccine may soon be out and fiscal stimulus may be on the way soon.
Here’s what Wall Street’s saying:
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
“The details of the service sector report revealed not only a solid increase in new orders, but also an increase in service sector employment. The new orders measure increased by 4.7 index points to 61.5, while employment increased to 51.8 from 47.9, finally pushing this key service sector measure into expansion territory. Remember, the Covid-19 lock down hit the service industry the hardest. Ending the third quarter on a positive note is also a healthy sign for the economy, as what is likely to be another difficult earnings season kicks off.”
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
"Glenmede’s Reopening Index estimates that it took only a month and a half from the middle of April to regain half of all economic activity lost due to social distancing orders. However, it took another 4 months through the end of October to reach 77% recovered, highlighting how each step toward full recovery has become incrementally more difficult to achieve. The model estimates that high-touch industries such as restaurant dining and air travel are only 42% recovered, as the heightened risk of viral contagion has kept a lid on activity. The Back-to-Work sub-index, which measures the proportion of businesses that had closed due to COVID-19 that have since reopened, currently sits at a mere 49%, suggesting there may be a meaningful portion of the economy that has yet to resume activity at any capacity.”
Burt White, Chief Investment Officer, LPL Financial:
"We empathize with concerns about a hotly contested election result. However, we think it’s important to differentiate the political impact of election uncertainty from the market impact. In most cases, despite the possibility of some market disruption, we believe the stock market will be forward-looking and see past the period of uncertainty. While there is a fair chance that the election result may be delayed slightly, we expect the strength of our political institutions to prevail, for the election outcome to be determined fairly, and for a timely transition of power. Even if the process is bumpier than expected, market risks will likely be tempered unless there’s a political breakdown that threatens lasting damage to the economy or corporate America, and we’re a long way from there."
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
"It seems like an unending list of fears in the markets, including resurgence of COVID-19; a very nasty election season with a possible Democratic sweep and higher taxes; increasing geopolitical tensions with China; and little progress on a new fiscal stimulus package. How could anyone suggest adding equity market exposure? We use a checklist. Inflation and forward inflation expectations drive Fed policy. Fed policy drives money availability. Money availability drives economy. Economy drives EPS, and full economic reopening should drive sector performance.”
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