Stocks fell Wednesday, after an up-day Tuesday. High valuations amid a recession, coupled with uncertainty over the timing of the end of lockdowns are cause for near-term market concern, Wall Street says.
All three major U.S. indices fell Wednesday, with the S&P 500 down more than 2%. Investors bought up the safe 10 year treasury bond, sending the yield down from 0.75% Tuesday to 0.63% Wednesday.
Medical experts in the White House House say May 1 may be too soon for the end of national lockdowns. Some states mull whether or not to end lockdowns, while others remain disciplined.
In the past few weeks, stocks have risen sharply, up 34% from their March 2020 lows, which represented a 34% drop from all-time-highs. The market had begun to look past the Coronavirus, the spread of which is decelerating. And stimulus from the federal government and central banks around the world is keeping interest rates low and liquidity flowing.
But with the market pricing in an optimistic scenario for an earnings contraction in 2020 and looking past into 2021 earnings — as seen by rich valuations — some on Wall Street are getting concerned. Stocks trade at above 18 times 2020 earnings. Before recessions, that multiple usually dips below 15, which it did, although it may do so again in the near-term.
Another ominous sign, which the market had already reconciled with far before this week, was scarily poor corporate and household credit. Bank of America’s (BAC) - Get Report earnings miss, one of many for large banks this week, came on the back of a huge credit loss provision expense. That stock fell more than 6%.
Retail sales fell 8.7% for March.
Here’s what Wall Street is saying:
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“We expected a relief rally an this has been a whole more than history suggested, but it does not change out view that the best time to be positive for anything more than a tactical trade is when the market pulls back toward the March low, because that is what it historically does. The various credit metrics and experts we use continue to point towards stress — maybe not as bad as very late March, but still high levels of credit stress, which again paint a picture of patience. ben if the market continues higher, we would rather become fundamentally offensive again when we have a clearer picture of credit and economic activity.”
Mike Loewwengart, Head, Investment Strategy, E*Trade
"Bleak retail sales, factory outputs, and corporate earnings are likely fairly priced in, but given the forward-looking vantage point of the markets it could be digesting Governors’ blueprints to reopen pockets of the country. Right now it sounds like these plans will be anything but normal and quick—the recovery will be long even as the economy starts to reopen.”
Brad McMillan, Chief Investment Officer, Commonwealth Financial Network:
"Risk factor #1: Valuation levels. Markets continued to show spiking volatility during the month, as investors continued to favor safe-haven assets over equities.
Lauren Goodwin, Economist, Multi-Asset Strategist, New York Life Investments:
"Confusion is growing over who will lead “back to work” efforts in the United States. While the Trump Administration identified its own committee, states on the West coast (Washington, Oregon, and California) and East coast (New York, New Jersey, Connecticut, Delaware, Rhode Island, Pennsylvania, and Massachusetts) announced working groups to restore their regional economies.
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