The stock market opened right below its latest highs on Monday as Wall Street continues to gush over the impending economic recovery, but Morgan Stanley cautioned in a morning note to clients that there are signs the actual reopening will be “more difficult than we’re dreaming about.”
Shortly after the market open, the Dow Jones Industrial Average and S&P 500, which both closed at record highs Friday, ticked down about 0.1% each, while the tech-heavy Nasdaq slipped 0.2%.
Oil stocks are heading up market gains Monday as the price of a barrel of West Texas Intermediate jumps 2%, pushing up shares of Devon Energy, Valero Energy and Marathon Oil by about 1.5% each.
Reflecting ongoing uncertainty over the impending economic reopening, shares of the world’s largest cruise operators—the cyclical stocks among last week’s biggest market gainers—are heading up losses Monday, with Norwegian Cruise Line, Carnival and Royal Caribbean down 1.7%, 1.4% and 1.2%, respectively.
On the deal front, shares of Massachusetts-based software company Nuance Communications are soaring nearly 20% after Microsoft (up 0.2% Monday) announced it’s acquiring the firm for $56 per share in a $19.7 billion deal that marks Microsoft’s second-largest acquisition ever, behind only its $24 billion LinkedIn takeover in 2016.
Despite the market’s new highs, Morgan Stanley equity strategist Michael Wilson said that “underneath the surface,” the diverging performance between small-cap and cyclical stocks, which tend to outperform during periods of economic growth, could be a “warning sign that the actual economic reopening will be more difficult than we’re dreaming about.”
The Russell 2000, a measure of small-cap stock performance that’s virtually flat Monday, is down 5% from a mid-March high after nearly doubling during the pandemic.
“At long last, we appear to be on the cusp of reopening the economy and getting our lives back to normal—and financial markets are excited,” Wilson says, noting that until recently small caps and cyclicals have been “stellar” outperformers. “In essence, they were discounting the recovery and reopening that we are about to experience, but now we must actually do it and with that comes execution risk and potential surprises that aren’t priced in.” Wilson notes that businesses are already starting to face crippling supply shortages in everything from materials and logistical support to labor, and he expects that could bring along bad news when companies report first-quarter earnings in the coming weeks.
What To Watch For
Big banks kick off earnings season this week, with JPMorgan, Wells Fargo and Goldman Sachs all set to report Wednesday before the market opens—the same day Coinbase, the nation’s largest cryptocurrency exchange, makes its highly awaited public-market debut on the Nasdaq. Citigroup, Bank of America, PepsiCo and Delta Air Lines are all slated to report earnings Thursday.
Since the Federal Reserve pledged in March 2020 to use its “full range of tools to support the U.S. economy,” the S&P 500 has skyrocketed nearly 80% from a mid-pandemic low to a new all-time high on Friday, and the Dow Jones Industrial Average and tech-heavy Nasdaq have posted similarly stunning gains of 76% and 102%, respectively. The labor market, on the other hand, has remained stubbornly below pre-pandemic levels, though it’s made promising progress in recent weeks. Fed Chair Jerome Powell insists the Fed will continue to bolster the economic recovery with historically low interest rates and $120 billion in monthly asset purchases until “substantial further progress” is made toward full employment—something still far on the horizon given the unemployment rate of 6%. On Sunday, Powell said the pandemic remains the “principal” risk to the economy if cases spike as a result of reopenings happening too quickly.
In an email Monday morning, Tom Manitone, a managing director at UBS Private Wealth Management, said that the Fed altering its message of accomodative monetary policy—which has been “an excellent tailwind” for markets—presents the main risk to markets. Powell’s next public speech is scheduled for 12 p.m. Eastern on Wednesday at the Economic Club of Washington.