Markets are biding their time.
Stocks rose modestly on Thursday after better-than-anticipated U.S. unemployment data, with weekly jobless claims reaching the lowest level since the start of the coronavirus pandemic. The major averages were practically flat in afternoon trading as investors awaited progress on a possible congressional stimulus package.
With so much still up in the air, it’s worth keeping an eye on trends that have started to play out in the wake of the pandemic, market watchers say.
Here’s what four of them told CNBC on Thursday:
Darrick Hamilton, economist and executive director at the Kirwan Institute for the Study of Race and Ethnicity at Ohio State University, said the slight improvement in jobs data was a start:
“We probably don’t want to be celebrating 1.2 million unemployed, but it obviously is an improvement compared to July. … The big picture is that our economy is on the brink of a potential collapse. I mean, the good news is that we can do something about it if we think about the context of this recession more broadly. We made the moral decision to hibernate the economy to prevent death. So, likewise, there is a public power that can be initiated to protect the economy and, even better, put us in a better situation coming out of this so that we’re more resilient to the next pandemic or the next economic downturn.”
Chris White, CEO of BondCliQ, raised concerns about the impact of Federal Reserve intervention in the bond market on the everyday investor:
“Traditionally, what we’ve seen is … markets that are divergent when we’re looking at the difference between what’s happening in the stock market and what’s happening in the bond market. I think seeing these two markets rally in tandem speaks to how unusual these markets are behaving today. And … you were talking about Fed intervention. In my opinion, this is the direct result of Fed intervention. Because what they’ve said publicly and what they’ve actually done every day in the market is consistently commit capital to buying corporate debt, buying Treasury debt, buying mortgage debt, and that’s just forcing yields lower, forcing prices higher, and this is what we’re seeing now, is a market that may be destroyed by the fact that there is a huge government-sponsored buyer. … There’s something that’s not being discussed consistently enough, and [it’s] what is the long-term impact of Fed intervention in the bond market on the end investor? And I think this is something that needs to be discussed because as the market is starved for yield, what it’s causing is effectively end investors to have to go further and further out in terms of credit quality in order just to get a decent return on yield. So, the risk of the market is now being held by the pension funds, the 401(k)s, the 529s in a way that’s never been seen before. So, the Fed believes it’s putting liquidity into these markets, but effectively what it’s doing is it’s starving the end investor.”
Darrell Cronk, president of the Wells Fargo Investment Institute, flagged some clear winners:
“We still actually like technology here and communications services and consumer discretionary. It’s interesting when you dissect the numbers. … So, the top five companies that we always talk so much about that are concentrated in the S&P are up 35% year to date. If you take the bottom 495 companies, down 6% year to date. So, you can see the divergence, right? The rest of the market is not participating. Those companies are still producing good top-line growth, good earnings, so, yes, you have to continue to add money there.”
Paul Meeks, lead portfolio manager at the Wireless Fund, also doubled down on tech, but noted buyers should pick their spots:
“We know that the fundamentals are superb. When you take a look at the quarterly reports last week from the major four or five tech companies and their guidance going forward, it was even better than the wildest imagination of the bulls. But at some point, you have to worry about valuations, and of course I do that all the time. So, the tell that I’m referring to is when you have companies that not only beat the numbers, they beat them soundly and they give very strong guidance, yet the next trading session or the next couple of trading sessions, the stocks weaken. That might be a tell that even for the bulls, too much is too much with valuations. Investor are going to have to differentiate between who is going to continue to do well on a structural basis and who are being lifted up by what hopefully is short term with the Covid virus. Those are two different worlds. And of course with the latter, once you start to see a vaccine or some sort of Covid relief, you probably want to exit stage left, particularly if you have one of those stocks with a crazy-high valuation.”
