Stocks Fall but the Market Is Optimistic

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An OPEC production cut and positive coronavirus spread trends gave reason for risk-on sentiment, although stocks were struggling to enter the green Monday, after a week of strong gains. 

All three major U.S. indices were down Monday, with the S&P 500 down 0.25%, after having risen more than 5% last week, bringing the index out of bear market territory. With risks still on the table and the average stock on the index trading at 17.5 times next year’s earnings at the beginning of a recession, investors may be slightly less incentivized to buy up stocks. 

"The downside we’re seeing today shouldn’t be interpreted too concretely as a reaction to more bad news, as last week we went on a tear and giving back some of the gains isn’t unusual," wrote Mike Loewengart, head of investment strategy at E*Trade. 

"But this week will be somewhat of an inkblot test in that there are multiple ways to read the state of play as earnings roll out: Is the downturn fully priced in, or is there cause for more downward pressure?" 

The 10 year treasury yield also rose to 0.75%, a sign that investors aren’t buying up safe assets. 

Defensive sectors weren’t seeing stocks rise. Defensive Dow Jones components like Procter and Gamble  (PG) - Get Procter & Gamble Company Report Coca-Cola  (KO) - Get Coca-Cola Company Report were down 0.35% and 1.9%, respectively. 

Morgan Stanley strategists also raised their year-end price target on the S&P 500 to 3,000, representing roughly 8% upside from here. Chief Strategist Mike Wilson is looking for a near-term pullback first, but for the Federal Reserve’s liquidity injections to see the market through. 

“Investors should have no doubt about the Fed’s resolve to do whatever it takes to make sure this recession does not turn into a depression,” Wilson wrote, noting that the Fed is now buying high yield bonds to support prices and keep the cost of borrowing low. Credit spreads have recently thinned out a bit. 

Wilson looks or a normalizing equity risk premium, or the excess rate of return expected on stocks for the next year against the interest rate on the 10 year treasury bond. The premium hit 7% in March and is now around 5%, low for a recession period, but high for a normal moment. 

The shades of optimism come as OPEC agreed to cut oil production by 9.7 million barrels a day, a price-positive agreement, albeit one that was anticipated well beforehand and anticipated at a cut of potentially a 20 million barrels. 

The price of oil rose 1.27%. Exxon Mobile  (XOM) - Get Exxon Mobil Corporation Report and Chevon  (CVX) - Get Chevron Corporation Report both fell 1.5%. 

Another positive point was data on the Coronavirus. The rate of infection spread is decelerating in New York. The White House says the same may be true for the U.S. more broadly. 

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