The market turned more risk-on Friday after a rough 24 hours, as President Trump spoke at the White House without mentioning tariffs or sanctions on China. Importantly, the gains were driven by tech stocks, not other economically-sensitive areas of the market.
Stocks mostly rose Friday, with the S&P 500 up 0.48%. The gains were led by the tech-heavy Nasdaq, which rose 1.29%. Investors still bought up the safe 10-Year Treasury bond, sending the yield down to 0.65%, after Federal Reserve Chairman Jerome Powell told a Princeton professor he sees near-term deflation as more likely than inflation as monetary and fiscal stimulus roll through the system.
The S&P 500 had fallen by as much as 1.5% from its weekly peak Thursday afternoon to late Friday afternoon. That was after President Trump announced he would hold a press conference regarding China. Investors, eyeing the recent political spats between the U.S. and China, were nervous that Trump would announced tariffs on unwillingness to move closer to a full trade deal with China. Instead, Trump continued his hardline stance on China, but didn't mentioned material trade-related actions on China. Stocks jumped.
But the gains weren’t lead by the most cyclical sectors like banks, industrials and consumer discretionary. Those sectors all fell, after having outperformed by a wide margin since May 13, the beginning of the market’s second leg of a risk-on move.
The New York Stock Exchange FANG Index rose 0.1.32%.
Semiconductors, while somewhat cyclical, also have secular growth drivers like data center and cloud spend. Those stocks rose Friday, with the iShares PHLX Semiconductor ETF (SOXX) - Get iShares PHLX SOX Semiconductor Sector Index Fund Report up 2.56%. Chip makers could be negatively impacted by trade disputes, as they have manufacturing plants in China and want to avoid tariffs. Nvidia (NVDA) - Get NVIDIA Corporation Report, which has a booming data center business, rose 4.58%.
Another positive signal is the bond market, which is benefiting from monetary and fiscal stimulus. Banks have extended trillions of dollars of loans to companies this month, more than in all of 2019. Credit spreads narrowed this week, with high yield spreads in the U.S. down to almost 6.5%, according to data from the St. Louis Fed. A normal and healthy spreads is usually around 4.5% to 5%.
Here’s what Wall Street’s saying
Lori Calvasina, Chief U.S. Equity Strategist, RBC Captal Markets:
"US equity investors continue to explore why the S&P 500 continued to rally in May. Our view remains that the move in the S&P 500 off the March 23 rd low has been mostly driven by the Fed as well as the anticipation of a 2Q bottoming in economic activity. On the economy, direction has mattered more than level to stocks recently. This week investors got additional evidence that things are headed in the right direction. The S&P 500 remains highly news flow driven. The market has been shrugging off early indications that US-China relations are taking a turn for the worse, but this resilience may not last if it becomes the main story investors have to consider.”
Kevin Dennean, Americas Technology & Communication Services Analyst, UBS:
"The impact of the COVID-19 virus and the heightened US/China tensions has caused a re-evaluation of supply chains in many industries, technology included. While other industries may move some manufacturing back to the US, we think the IT industry will continue the process of re-shoring, rather than on-shoring jobs back to the US. However, the semiconductor industry may have to adapt to a new post-COVID world as well as the heightened US/China tensions.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“On Tuesday, we made a move to offense as the market broke out of the trading range since early April accompanied by (1 further improvement in credit and 2) led by the economically sensitive areas. Literally right after we released yesterday’s note, President Trump announced a press conference regarding potential action on China as the global economy attempts that caused immediate volatility. Escalating tension with China as the global economy attempts to find its footing, coupled with such strong recent gains, opens the door for potential consolidation.”
Scott Knapp, Chief Market Strategist, CUNA Mutual Group:
"Market rallies in recent weeks have been encouraging. I think the strong returns are attributable to three main developments – rejection of recency bias, signs of broadening stability in key indicators, and reassurance from stimulus efforts.”