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Stocks Surge. Market at an Inflection Point? What Wall Street’s Saying

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Stocks rose considerably Tuesday on optimism that a coronavirus vaccine will soon hit the market. Moreover, the nature of the recent stock market rally is a strong indication that a sustainable bull market may be well underway, many on Wall Street imply. 

All three major U.S. indices rose, with the S&P 500 up 1.23%. The safe 10-Year Treasury bond saw its yield rise to 0.69%. Yields rise when prices fall. 

Importantly, sector leadership in the market has shifted away from growth tech stocks, which investors tend to buy to avoid economic risk, and into cyclical value stocks, which perform well when investors expect the economy to grow. 

Tuesday, the S&P 500 Equal-Weight Consumer Discretionary Index rose 4.73%. The Energy Select Sector SPDR ETF  (XLE)  rose 2.7% as crude oil rose 2.56% to $34 a barrel. As the yield curve has expanded, the Invesco KBW Bank ETF  (KBWB)  rose: +8.64%. The Vanguard S&P 500 value ETF  (VOOV)  rose 2.4%. The Vanguard S&P 500 Growth ETF  (VOOG)  rose just 0.43%. 

And the cyclical trend has been on for roughly two weeks now. Here’s how these groups of stocks have performed since May 13:

  • S&P 500: +6%
  • KBW: +17% 
  • Consumer Discretionary: +17% 
  • Value etf: +7%
  • Growth etf: +5% 

The drivers have been re-openings of varying degrees in all 50 states, vaccine optimism, and monetary and fiscal stimulus.

The Federal Reserve’s efforts seem to be spurring lending and boosting liquidity. The money supply has expanded meaningfully since the start of the Fed’s quantitative easing program this year and that cash is getting to right places, according to Morgan Stanley research.

Roughly $800 billion of cash has flowed into bank deposits, one indication that banks are issuing credit, which bridges the gap between high levels of unemployment to a reopened, back-to-work economy. 

The biggest risk: a second wave viruses hits, while the market trades at rich valuations.

On Friday, risk-on sentiment was driven by Novavax NVAX saying it is ready for human testing of its coronavirus vaccine. The stock rose 4.47%.

Here’s what Wall Street is saying:

Peter Essele, Head, Portfolio Management, Commonwealth Financial Network:

"Stock markets posted another day of gains as investor optimism was stoked by easing social distancing restrictions and an economy poised for action. The Dow gained 650 points by mid-afternoon trading with financials and industrials experiencing the largest gains at 6 and 5 percent, respectively. The nation’s largest banks, JP Morgan and Bank of America, neared double-digit returns as long-term Treasuries rates rose more than shorter maturities causing a slight steepening of the yield curve, a positive for names in this sector.” 

Tony Dwyer, Chief Market Strategist, Canaccord Genuity:

“Signs of “economic trade” finally showing signs of life. We believe the “COVID-19 Trade” may finally be be showing signs of being ready totter over leadership. The relative performance of KBW Bank stock Index (banks)to the SPX has…[seen a] relate reversal in the relative 10-wee krate-of-change. Suggests the relative performance rebound could have some legs.” Dwyer adds that industrial stocks have recently performed well."

Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley: 

“The U.S. money supply has been growing quickly since quantitative easing restarted. M2 money supply and near money equivalents have grown by 22 of the money supply in 3 months, an amount multiple times bigger than in 2008. We see a good chance that as we move through the year and into 2021 that an increase in the money supply may provide a tailwind to inflation.” 

Jeffrey Buchbinder, Equity Strategist, LPL Financial:

"2020 earnings estimates have plunged, and a return to “normal” earnings could be two years or more away. While our headline number is slightly more pessimistic, we believe the economic recovery in the United States likely may be steady through year-end and into 2021, bolstered by significant fiscal and monetary stimulus and potential medical breakthroughs. We are envisioning a U-shaped or “swoosh” recovery rather than a V-shaped; a W-shaped recovery may be possible if a second wave of infections hits. Our year-end 2020 fair-value target range for the S&P 500 remains 3,150–3,200, less than 7% from the May 22 market close. In the short-term, we still think stocks have come too far, too fast, and a 10% pullback would not surprise us.” 

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