Stocks fell Thursday, even as economic data traded positively and the monetary stimulus program in the European Union expanded. Many on Wall Street point out that the trajectory of the economy looks positive, but that discernible risks against high valuations are cause for near-term concern.
All three major U.S. indices were pressured Thursday, with the S&P 500 falling 0.34%. But the 10-Year Treasury yield rose to 0.82%, a strong risk-on signal, which was also found elsewhere in the market.
Positively, the European Central Bank announced it is increasing its bond-buying program by $680 billion to a total of $1.5 trillion.
Also, jobless claims for the past week were 1.8 million, slightly worse than estimates, but trending better than last week’s result of 2 million. That's consistent with the positive trend seen in many economic data points as, excluding a second wave of the coronavirus or prolonged shut downs, the economy looks to have bottomed.
But the S&P 500 took a bit of a breather, as it has been up 10% since May 13, extending the forward price-to-earnings ratio to almost 25 times, partly driven by lower interest rates.
Still, the equity market showed risk-on characteristics. Investors were less negative on value stocks than on growth stocks, a bullish signal for the economy. The S&P 500 Value ETF (VOOV) rose 0.28%, while the growth counterpart (VOOG) fell 0.85%.
One cyclical value stock, American Airlines (AAL) , skyrocketed, along with other major airlines. American rose 41% after the company said it is seeing improving demand.
Interestingly, EU-exposed stocks in the U.S. rose, while the EU market fell. The Stoxx 600 fell 0.72%, but Booking Holdings (BKNG) , which sees 79% of its revenue from Europe, rose 0.97%. Honeywell (HON) , which sees 24% of revenue from Europe, rose 1.67%. Fiat-Chrysler (FCAU) , which sees 18% of revenue from Europe, rose 0.51%.
Here’s what Wall Street’s saying:
Mike Loewengart, Head, Investment Strategy, E*Trade:
"The market has been on a rally lately so seeing a pullback after swift gains is expected. Not to mention, it’s a big week on the jobs front. So while ADP reported an optimistic picture, weekly jobless claims rolled in higher than expectations which could deflate some optimism around the health of the US economy. While monetary stimulus is no doubt needed in the current environment, it’s not a cure all to the issues that still face the EU on its path to recovery. Also, hopes of monetary stimulus from central banks could have been baked into market expectations and now it’s taking the news in stride.”
Lindsey Bell, Chief Investment Strategist, Ally Invest:
"It could have been a buy the rumor sell the news type of trade. People were expecting the ECB to take this move. The announcement was better than expected. There’s been a pretty good run up, but a lot of good news has ben priced into the EU markets. Investors in Europe might be taking a bit of a breather after the good news that they got. The valuations [in U.S.] are starting to get rich. The reality is, there’s still a lot of uncertainty.”
Lori Calvasina, Chief U.S. Equity Strategist, RBC Capital Markets:
"Bottom-up sell-side 2021 EPS growth forecasts haven’t budged much and still seem too aggressive. We continue to view the possibility of another wave of downward revisions as a risk to stock prices later this year. We’ve updated our own S&P 500 EPS model, and have lowered our forecasts to $126 for 2020 and $149 for 2021 (down from $135 and $153, respectively). There’s no change to our S&P 500 price target of 2750 at this time. The rate of downward revisions is starting to improve. After falling to 8% in mid-April, below the 10% low water mark seen in past recessions, this indicator rose to 35% as June began (Exhibit 4). The trend we see in this indicator mimics what we are seeing in a number of industrial related indicators (ISM and regional Fed surveys on manufacturing, capex, and employment), where the levels are near Financial Crisis lows, but the rate of change is positive. This is feeding into the “things are getting less bad” narrative that’s partially responsible for boosting US equity prices."
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