The great rotation continues, with some of the most down-trodden names leading the market higher: industrials, airlines, financial institutions, and energy companies.
Powerful monetary and fiscal stimulus programs are keeping stocks aloft, as investors continue to shift funds to parts of the market they believe will be helped by economic reopenings.
So far, the market has not reacted to the violent protests that erupted all across the U.S. after the death of George Floyd in Minneapolis resulted in charges of third-degree murder against a police officer. Across the U.S., there has been looting on city streets and buildings have been destroyed, yet the stock market has ignored it.
“The market is a forward looking mechanism. They see six months from now, nine months from now there will be more semblance of order. The economy will be coming back, and earnings will be coming back. Estimates have stopped going down,” said Steven DeSanctis, Jefferies equity strategist. “You have the full support of the Fed … the flows into credit markets have been incredible. The capital markets are open. IPOs and secondary offerings are getting done.”
Since credit markets seized up in February, the Fed has created program after program to keep the credit markets moving, including more funding in short-term lending markets, Treasury purchases, a commercial paper facility, a municipal bond program, and a plan to buy corporate bonds. The Fed had already cut rates to zero, and has promised to do whatever else is needed, even as it ballooned its balance sheet to $7.1 trillion.
With the Fed in the market, companies have already issued more than $1 trillion in new debt at twice the pace of last year, and at relatively low rates. That has enabled corporate America to restructure existing debt and build cash hoards to weather the downturn. Amazon, for instance, priced $10 billion in new debt Monday, including a 3-year bond with a 0.4% yield.
“All of that outweighs what’s going on,” said Desanctis. “The big thing with social unrest is in two weeks from now, if we get an uptick int the virus and that delays openings, that is something that impacts markets.”
Lori Calvasina, chief U.S. equity strategist at RBC, said the protests could become an issue for stocks if they have a significant impact on consumer or business confidence, as the economy is reopening. The market has also been watching but mostly shaking off the growing tensions between the U.S. and China.
“We have a giant Fed cycle that looks like it’s never going to stop,” said Calvasina. “Is the Fed lift powerful enough to offset negative news? They acted with leadership and acted early and were aggressive. They did everything they could, and it’s helping. It may be just that simple.” The Fed is not alone, and analysts also point to global central banks including the European Central Bank, expected to expand its programs this week.
The unrest, which has resulted in damage in dozens of cities, has led some on Wall Street to draw parallels to 1968, a year of tumult. There were riots and protests in a divided America, and both civil rights leader Martin Luther King and Sen. Robert Kennedy, a presidential candidate, were assassinated. After a 9% drop for the S&P 500 from January to March, the market rallied 24% and ended 7.6% higher.
But Barry Knapp, managing partner at Ironsides Macroeconomics, said the better comparison could be 1958 or 1980. “In both those occasions, we had a very sharp, short recession. The reason for the recession was government policy in 1980. In that case it was [President Jimmy] Carter putting credit controls on the economy,” said Knapp. “ISM went from over 50 in February to 29 in May and then shot back up to 56 by the time the election came around. You had a sharp sell-off seven days longer than this one and the market just rallied right into the election.”
Both DeSanctis and Knapp said the market could be vulnerable to a shallow pullback, but the expect to continue to see a broadening of the rally and money flowing into the underperforming cyclicals.
The S&P 500 ended Tuesday up 1% at 3,080 and has rallied 40% from the March low. The XRT SPDR S&P Retail ETF was just barely higher at the close but it had been up 1.8% in early trading, even though retail establishments have been looted and many have protectively closed in protest areas. The iconic Herald Square Macy’s flagship store in New York City was looted Monday. DeSanctis said the sector will have insured losses on some stores.
Airline stocks were up 1.6% amid continued optimism that people will increase travel as the economy opens up more and more. They are up over 13% over the past month but down 52% for the year. Commercial banks were up 2.4%.
“It’s the beginning of a new business cycle. You shouldn’t get all beared up, and you’re not supposed to focus on valuations. This is the early stage of the business cycle,” said Knapp.
Small caps have also surged, along with the cyclicals. “The Russell is up 42% off the lows the cyclicals are up 40%…the big divergence this year was the fact this year was growth and the speculative stuff held up in the downturn,” said DeSanctis. “Usually, those are the stocks that go down in a downturn. … Health care is going to be the fix to the pandemic. These stocks have gotten a lot more interest.”