Stocks are displaying their resilience after making back their early-morning losses today, as Pfizer (PFE), Walt Disney (DIS), TripAdvisor (TRIP), Netflix (NFLX) and Johnson Controls (JCI) have gained.
Agence France-Presse/Getty Images The S&P 500 has gained 0.4% to 1,885 at 12:25 p.m., while the Dow Jones Industrial Average has ticked up 0.1% to 16,514.72. The Nasdaq Composite has climbed 0.9% to 4,127.27 and the small-company Russell 2000 has jumped 1% to 1,113.66. The 10-year Treasury yield is little changed at 2.51%.
Pfizer has gained 1.4% to $29.53 after its final offer was rejected by Astra Zeneca (AZN), which has dropped 11% to $71.52.
Walt Disney has risen 1.1% to $81.23 after it raised ticket prices at Disney Land and was started at Buy at Hudson Square.
TripAdvisor has jumped 5% to $86.28 as summer travel is expected to be busy this year, while Netflix has climbed 4.8% to $366.55.
Johnson Controls has advanced 4% to $46.58 after it said it would spinoff its auto interiors business.
JPMorgan’s Mislav Matejka and team argue that low yields are good for stocks:
We don't think that the recent bond rally should be interpreted as a negative for equities. In the past the inversion in the yield curve was a useful leading indicator, but we don't believe that this model is applicable currently, as short rates remain at extreme lows. The recent bond rally is clearly partly due to the loss of US growth momentum in Q1, but our fixed income strategists suggest that it was also due to expectations of a lower neutral Fed funds rate, declining duration
supply and subdued inflation.
While equity indices so far shrugged off the bond rally, within the market the Defensives have outperformed Cyclicals by more than 500bp in both the US and Europe ytd. We see similarities to 2013, where in the 1H bonds rallied and Defensives led, only for Cyclicals and Value to pick up in 2H. Last year it was the tapering that jump-started move up in yields, this time around it could be the reacceleration in global growth and/or action from ECB.
Goldman Sachs strategist David Kostin and team note that investors continue to look “below-the surface” as the S&P 500 continues its journey to nowhere.
Investors continue to search for below-the-surface opportunities as the S&P 500 meanders along near all-time high levels amid low volatility and support from corporate buybacks. Our weak balance sheet portfolio deserves attention given the 7% YTD absolute return – tops among our thematic baskets – and 600 bp of steady outperformance versus a basket of strong balance sheet stocks. We believe weak balance sheet firms will continue to lead based on history and our credit and the economic outlooks.
The biggest risk to continued weak balance sheet outperformance is tighter financial conditions. Our FCI has eased considerably in 2014 and steadily during the past two years. But our forecasts for only modest equity returns and credit spread tightening coupled with rising US Treasury yields implies conditions could tighten. However, the leveraged loan market tells the opposite story: first lien covenant-lite loans now account for 63% of issuance, up from 33% in 2012 and just 5% in 2010. Although S&P 500 leverage metrics remain strong, the recent trend has been higher with the debt/asset ratio rising by 100 bp to 27% in the past six months.
Of course, that’s what caused the financial crisis in the first place.
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