Stocks are up Tuesday, although the gains eased from the morning. Consumer discretionary stocks are crushing the market, as state reopenings, vaccine optimism and stimulus are all working to the consumer’s favor for the moment.
All three major U.S. indices soared Tuesday, with the S&P 500 up 2.1% in the morning, but only 1.6% by midday. The 10 year treasury yield had risen to 0.7% in the morning, but had only risen to 0.69% by midday. Yields rise when prices fall.
The S&P 500 Equal-Weight Consumer Discretionary Index rose 4.6%. The index is up 50% since the market’s March 23 bear market low, against the S&P 500’s 34% gain. This shows investors’ optimism that the current stimulus efforts will bridge the gap to the eventual full reopenings of states. Still, the consumer discretionary index is about 20% below its 2020 high, while valuations have stretched, reflecting that earnings estimates for the year have been meaningfully ratcheted down.
Nike (NKE) , for instance, rose 3% Tuesday. It now trades at 34 times 2020 earnings, versus a multi-year high of about 30 times, as the market prices in a 2021 recovery. Strategists at RBC Capital Markets wrote in a recent note that consumer discretionaries are trading at a premium earnings multiple versus the SP 500’s average of roughly 24 times 2020 earnings. "The shareholder return backdrop for the sector is unfavorable,” wrote Lori Calvasina, head of U.S. equity strategy at RBC.
Broadly speaking the optimism has been sparked by all 50 states having some plan to reopen and the fact that multiple companies have said they’re moving closer to getting a coronavirus vaccine to market. Tuesday, Novavax (NVAX) , which rose 13%, said it is ready for the human testing phase of its vaccine. Moderna (MRNA) recently showed signs it is inching closer to finishing its vaccine.
Meanwhile, monetary and fiscal stimulus has down what it can to keep debt markets functioning and consumers’ afloat.
According to strategists at Morgan Stanley, the U.S. money supply has increased 22% since start of of this year’s quantitive easing, in which the Federal Reserve buys treasury bonds to keep interest rates low and cash flowing. The increase in this amount of time since the start of the easing program in 2008 was 5%.
Mike Wilson, Morgan Stanley’s chief US. equity strategist wrote in his note that the money is going to right places. His chart showed that there has been an $800 bilion increase in bank deposits since start of this year’s easing program, as banks have used the liquidity to lend.