Stocks Fall and Virus Cases Rise, Testing Investor Nerves

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Stocks were falling Wednesday as coronavirus cases continued spiking, while investors are nervous about valuation. 

All three major U.S. indices were substantially lower, with the S&P 500 down as much as 1%. The 10-Year Treasury yield was down to 0.71%. 

The 5-day moving average of daly new virus cases in the U.S. hit 34,000 Wednesday, according to Johns Hopkins data. That level was last seen in late April. Just about a month ago, the trend was at 17,000. 

"Mounting anxiety that the second wave contagion would dent the pace of business reopening,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank in emailed remarks to reporters. 

Some strategists, though, have recently noted that investors are worried less about virus cases than they were weeks ago and more about actual lockdowns, although to Ozkardeskaya’s point, a high enough infection rate could cause those lockdowns. 

And this is all met with valuation concerns. 

"A surge in those who say valuations are a problem, [is] to a new survey high,” wrote RBC Capital Market’s Head of U.S. Equity Strategy, Lori Calvasina in a note. "Those who say valuations are attractive or very attractive plummeted to one of the lowest levels we have seen since we started conducting the survey in first quarter 2018 (just 13%). By contrast, those who say valuations are expensive or very expensive surged. At 56%, this is the highest percentage of respondents we have seen in the survey who believe valuations are expensive or very expensive."

Calvasina said this portion of investors worried about valuation has historically equated to rough times ahead for stocks. 

On valuation, 22 times forward earnings on the S&P 500 looks expensive, compared to a historical average below 17 times. But historically low interest rates are part of the picture, creating an equity risk premium — excess rate of forward one-year earnings return on stocks over safe treasuries — of almost 3.8%. Historically, that premium demanded return sits at around 3.5% for healthy economic environment.

Interestingly, cyclical value stocks were selling off Thursday and those are on the cheaper side of the index’s valuation. The Vanguard S&P 500 value etf  (VOOV) - Get Report has an equity risk premium of roughly 5%. 

Energy ETF  (XLE) - Get Report fell more than 2%, while banking ETF  (KBWB) - Get Report fell more than 3%. 

Importantly, while some may argue valuations look acceptable, the economic risks are potentially grave, especially if employment returns slowly, regardless of the virus. 

One shining star Thursday was the $230 billion market chip maker Nvidia  (NVDA) - Get Report, which provided a little support to tech indices. Nvidia rose 0.6% in pre-market trading before falling 0.35%, outperforming the market. Nvidia and Mercedes have a deal for autonomous vehicles starting in 2024. Alliance Bernstein analyst Stacy Rasgon models roughly $600 million in additional revenue to Nvidia, which will provide hardware components to the highly tech-driven car. 

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