Stocks continued rising Thursday, as added Federal Reserve stimulus and a reported OPEC oil production cut powered the market. But Wall Street is throwing up a warning flag, especially when it comes to earnings.
All three major U.S. indices ended the day higher, with the S&P 500 up 1.45%. The benchmark index is now up 25% from its 2020 low and only 17% below its all-time-high hit in February, deeming the index officially out of bear market territory, which is defined by a 20% drop from the high.
The 10 year treasury yield slipped to 0.72% from 0.76%, as Thursday’s action was vey much driven by liquidity. High yield bonds, which haven’t been getting much appreciation from investors this year — investment grades have ben better supported by the ed’s stimulus — started showing signs of life. The share price of the iShares iBoxx High Yield Bond ETF rose 6% Thursday, a sign that investors are more comfortable with companies’ promise to repay expensive and risky debt.
These dynamics came as the Fed said it will inject an additional $2.3 trillion of cash into its existing lending programs for households and businesses rapidly become illiquid. Municipalities will receive loans as well.
In oil, OPEC reportedly agreed to cut production by potentially 20 million barrels per day, an outcome investors had already priced in. Crude oil rose for most of the day, before falling 5%. Still, one of the small, debt-laden U.S. oil explorers, Apache (APA) - Get Report, saw its stock rise 8%, with giants like Exxon Mobil (XOM) - Get Report fell.
With the S&P 500 down just 14% year-to-date, Wall street is now warning that prices aren’t matching up closely with the bleak earnings picture to be expected.
Here’s what Wall Street had to say:
Lauren Goodwin, Economist, Multi-Asset Strategist, New York Life Investments:
"There is a growing realization among U.S. policymakers that the $350 billion allotted for the paycheck protection program (PPP) is insufficient given the cash flow shortfall that small businesses face. So far, the loans processed cover payroll for fewer than 7 million employees, or less than 10% of all small business employees. At the current pace of loan processing ($68 billion so far), banks and the Small Business Administration will have used up the full program allotment by April 23, just 12 business days from now.”
Seema Shah, Chief Strategist, Principal Global Investors:
"Its [the Fed’s] decision to expand its corporate lending programs to include some riskier debt, that had originally been excluded, may provide some much welcome relief in segments of the high yield market which had been showing signs of severe stress. Fears about how the high yield market would absorb the wave of oncoming ‘fallen angels’ has been weighing heavily on the market. Main Street should be feeling a slight sense of relief today. The latest measures emphasize how committed the Fed is to providing relief and economic support where they can, stretching outside the typical toolkit in order to deliver assistance. Today’s jobless claims numbers, slightly higher than anticipated, emphasize how important it is that small and mid-sized businesses feel the benefits of Fed policy which, typically, has only tended to reach the larger-sized businesses.”
Lindsey Bell, Chief Investment Strategist, Ally Invest:
"U.S.stocks are rallying. But is it sustainable? As we’ve seen some hope that the coronavirus crisis may be peaking and unwavering Fed support, investor sentiment has turned. The S&P 500 Index has jumped 23% since March 23. But bear markets can do a few bull market “head fakes” before bottoming, and we’re not fully convinced this is the end.”
Mark Haefele, CIO, Global Wealth Management, UBS:
"We expect the economic fallout from COVID-19 to be severe. Social distancing measures aimed at containing the coronavirus are driving one of the sharpest slowdowns in economic history. Despite aggressive monetary and fiscal responses from governments around the world, corporate profits will suffer a huge near-term blow.”
Haefele’s U.S. 2020 EPS forecast: -26% year-over-year.
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