Markets Are Push and Pull: What Wall Street’s Saying

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Even as the market weighed several negatives and positives on Friday, all three major U.S. indices ended the day higher, with the S&P 500 up 0.39%. Friday marks the second day in a row that stocks plummeted in the morning and largely gained everything back to end the day.

This push and pull indicates disagreement between bulls and bears about what lies ahead. There’s an increasingly clear divergence between those on Wall Street that see a V-shaped recovery and those that see a more gradual one. 

For Friday alone, there were several negatives and positives. 

Negatively, the U.S. and China continue to have poor relations. The U.S. sent navy ships towards China, according to CNN. That’s partly a retaliation for China’s handling of the coronavirus outbreak. And trade relations remain on ice. 

Also a negative, April retail sales in the U.S. came in at a 16% decrease, against economists expectations of a 12% drop. This comes after many consumer companies say they’ve seen a less severe drop in sales in April, compared to March. 

Investors also continue to consider the possibility that a re-spike in virus infections could occur with potentially premature state reopenings. 

Positively, China is showing signs of moving back to pre-virus levels of economic output and some on Wall Street are taking note that the U.S. could follow suit. 

But this week has largely seen a reconciling with risk. 

The move into safety was clear this week and continued the trend we've seen since late April. The 10-Year Treasury yield fell about 5 basis points. Recently, bond investors have shown they won’t buy too many treasuries, as the treasury department issues new bonds to fund stimulus spend and investors weigh the prospect of inflation when a recovery truly takes hold. And still, treasury prices are rising. 

The move into safety has been a theme of the broader run-up in stocks since late March. 

The rally since March 23 has been lead by low interest rates liquidity. The 10-Year Treasury yield was at 0.85% at the start of the rally, before the Federal Reserve poured trillions of dollars into the treasury market to incentive lower rates on riskier corporate bonds.

This week, the liquidity has been working: $730 billion in investment grade corporate bonds were issued, according to research from Strategists Canaccord Genuity, who point out that all sectors are borrowing, a positive sign for the economy and market. In all of 2019, U.S. companies issued $975 billion.

This is a strong signal. Bond managers TheStreet has spoken with say this reflects that low rates are enabling companies to raise cash and stay liquid, which can fuel a solid recovery, but that the rush for capital also reflects that companies are uncertain about the future, and that they don’t know how long capital markets will be so open for. 

Notably, Nike  (NKE) - Get Report said it is opening all stores in the China region and a few in the U.S. The stock outperformed, rising 0.51%.

Here’s what Wall Street’s saying: 

Team, Morgan Stanley Economists, Strategists:

“Output levels in China will get back to 100% in June which is better than expected. The recovery has been going well because the outbreak was less severe than in Europe/US and processes in place for tracking has allowed for a faster restart. Manufacturing (which is 40% of GDP) levels have already returned to normal while services are still below normal. What does this mean for the U.S./Europe? While we don’t expect the US/Europe to directly mimic the rate of recovery seen in China due to less of a widespread outbreak, more severe lockdown measures and the percent of manufacturing within GDP, we do expect to see a quicker snapback. Our view is that we will see a sustainable V-shaped recovery.” 

Mike Loewengart, Head, Investment Strategy, E*Trade: 

“[Retail data] paints a pretty bleak picture for earnings expectations, with major retailers like JC Penney, Nordstrom, and Target set to report next week.” 

Michael Sheldon, Chief Investment Officer, RDM Financial Group to TheStreet:

“Investors are reacting to the fact that the economy remains very weak and short-term interest rates are close to 0%. Some investors are starting to worry about all the treasury issuance and higher rates and higher inflation. If interest rates rise too much, it would damaging to the U.S. economy."

Lindsey Bell, Chief Investment Strategist, Ally Invest 

"The tide turned on U.S. stocks this week, but we’ve felt the ground shifting underneath us for a few weeks. After the S&P 500’s best rally since the Great Depression, stocks have stalled out over the past month. Individual investors (including Ally Invest customers) are still buying, and actions speak louder than words. But the average investor’s sentiment is turning cautious, and professional investors are stepping out of the market. The last time we saw this much nervousness from both groups was July 2008. Fund managers are also sitting on the most cash in their portfolios since 2001, and well-known investors like David Tepper, Stanley Druckenmiller, and Warren Buffet have turned bearish. When market moguls react, the investing world pays attention.” 

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