‘Silent melt-up’ in stocks to continue, but switch into value delayed until virus fears recede, strategist says

Apple dropped a big bomb on markets when it announced on Presidents Day that it won’t meet sales targets due to the coronavirus that has ravaged the Chinese economy.

Strategists at Credit Suisse said the coronavirus came up at every recent marketing meeting. “In the short term, we suspect that the hit to Chinese GDP could be significantly larger than consensus expects, but we believe this is a postponement, not a cancellation, of a global recovery and that the policy response should make up for most of the growth shortfall. We think weak data will be dismissed as temporary (barring a sustained rise in corporate defaults, which looks unlikely to us),” they said.

That leads to the call of the day, which comes from Evercore ISI strategist Dennis DeBusschere, who sees a “silent melt-up” in markets. He says the yield on the 10-year Treasury TMUBMUSD10Y, -2.52% has dropped not because of growth expectations but because of the decline in the term premium, which is the inflation-risk compensation. “Bottom line, the real growth signal from 10-year yields is not nearly as bad as the overall 10-year suggest,” he says.

And that backdrop is positive for stocks. “While the combination of low inflation risk, solid growth outlook, and high earnings yields lasts, equities will continue to march higher. The appetite for deflation hedging and the global savings glut is likely anchoring term premiums, [and] it is hard to predict when that dynamic will reverse,” he writes.

He also said the market is near a point where there will be a reversal in growth stocks relative to value.

“For now though, we will wait for evidence of a calming of Covid [coronavirus] fears before suggesting investors position for a sharp factor reversal,” he said.

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