Stocks rebounded from yesterday’s rout today as 3M (MMM), Visa (V), Regeneron Pharmaceuticals (REGN), Allergan (AGN) and Mosaic (MOS) helped lead the major indexes higher.
Bloomberg The S&P 500 rose 1.1% to 1,838.88, its largest gain since Dec. 18, while the Dow Jones Industrial Average gained 0.7% to 16,373.86, snapping a four day losing streak.
Stocks were given a boost by better-than-forecast retail sales in December, which rekindled hope that the economy wouldn’t experience a growth fear similar to years past. Citigroup’s Peter D’Antonio explains:
The way we're looking at this report, any positive number on core retail sales should be seen as strong. Although markets tend to get keyed up about December retail sales (and the holiday shopping season), the real action actually occurred by November this year. The previous three months' core readings were up 1.6% (not annualized), implying a very high starting point for holiday sales.
Yet despite the numbers, stocks look far less attractive than they did a year ago, when stocks were cheap and bonds expensive and that meant investors should favor the former over the latter. Those days are gone, says Societe Generale’s Alain Bokobza and team. They write:
The process of normalisation (convergence of ERP with long-term average ERP) of the equity risk premium that began around two years ago is approaching an important inflexion point for the US equity market. Due to the rapid rise in US government bond yield, our proprietary equity risk premium model indicates that the US equity risk premium is on the verge of moving below its long-term average. Historically, bonds are considered to be cheap relative to equities once equity risk premiums move below their long-term averages.
Citigroup’s Tobias Levkovich believes we are in a secular bull market but warns of a bumpy ride. He writes:
One has to remember that there can be a secular run with substantive bumps along the way. No one questions the 1982-2000 equity bull market but there were some awful moments in that 18-year period including the stock market crash of 1987 and the sharp pullback in 1990 as well as in 1998. Thus, when lead indicators of volatility emerge, it is wise to pay attention and see them as buying opportunities to be expected and pounced upon…
A pick up in volatility should be anticipated as earnings become the main driver now and interest rates may become a headwind. Stocks outpaced underlying earnings by a factor of five in 2013 and it is likely that such gains are not going to be repeated. Indeed, the shape of the yield curve is quite effective as a two-year lead on market volatility and thus one should expect more choppiness in 2014 and probably 2015 than the fairly smooth experience of the past year. In this context, considering a 5%-10% pullback seems not only plausible but fairly rational.
Shares of 3M rose 2% to $137.41 today as a Nomura report mentioned it in a positive light, while Visa gained 1.7% to $222.65 after JPMorgan (JPM) said it had sold some shares but would remain a larger holder of its stock. Regeneron Pharmaceuticals advanced 12% to $300.32 after it said Eylea sales rose, Allergan jumped 5.9% to $121.22 after won a patent case that would protect one of its drugs, and Mosaic climbed 4.1% to $48.03.
No comments:
Post a Comment