Stocks rallied on Tuesday for the first time since Britain’s decision to leave the European Union sent global markets into free fall.
First, the scoreboard:
Dow: 17,409.72, +269.48, (1.57%)S&P 500: 2,036.09, +35.55, (1.78%) Nasdaq: 4,691.87, +97.42, (2.12%) WTI crude oil: $47.85 +$1.52, (3.3%) 10-year yield: 1.456% (-0.004)
The US economy was not as weak as we initially thought in the first quarter. The Department of Commerce released the third and final (for now) estimate of gross domestic product, which showed 1.1% growth, revised up from the second estimate of 0.8% and the advance print of 0.5%. The first quarter has consistently been revised higher for the past five years, so this improvement was expected. But there was a significant downward revision to personal consumption, which contributes to about 70% of growth. It was dropped to a two-year low of 1.5%, from 1.9%. Economists had expected an upward revision to 2%. Corporate profits were revised higher, and overall gross domestic income was lifted to 2.9%. The more complete data also showed that the gap between exports and imports was narrower than previously thought. In other economic data, home prices rose less than expected in April, according to the S&P/Case-Shiller home price index. Prices in 20 major cities rose 0.45% month-over-month (0.58% expected) and 5.4% year-over-year. Prices compared to last year rose the most in Portland, Oregon; Seattle, and Denver. But the numbers hid a growing divide between the top and bottom ends of the market, according to Zillow chief economist Svenja Gudell. “Conditions nationwide and in most large metros are much more forgiving for current homeowners looking to move into a bigger, more expensive home than for younger, entry-level buyers just looking to get a toe-hold in the market,” she wrote in a note.Consumer confidence rose more than expected in June.The Conference Board’s consumer confidence index improved to 98 in June from 92.4 in the prior month. The index had flatlined after steady gains in the past few years. It was lifted by a brighter outlook on current conditions, and a rise in the expectations index. “Unless stock prices rebound fully from the drop in recent days, we’ll have to expect confidence to slip back a bit over the summer, but not to disastrously low levels,” said Pantheon Macroeconomics’ Ian Shepherdson. Airbnb is raising a new round of funding that would value the company at $30 billion, the New York Times reported. That would triple the home-rental’s valuation from what it was worth two years ago, and would make it the second most valuable privately held tech startup after Uber. Prepare for more volatility in markets. The type of sell-off we saw on Friday “is not the ‘one and done’ kind, but rather aftershocks are expected after the global earthquake,” according to JC O’Hara at FBN Securities. O’Hara said that in recent years, downturns such as the financial crisis and the European debt problems produced an initial drawdown and smaller subsequent reactions in the days that followed. That could happen again because the hit was not to a small part of the market. “When global markets, in unison, are hit, the recovery on average is not as robust and more often than not, choppy trading ensues,” O’Hara said. The big banks are acting like the Fed just cut rates.In a note, Morgan Stanley equity analyst Betsy Graseck said the drop in bank stocks following the Brexit vote has already baked in a rate cut. The yield on the overnight portion of the yield curve fell five basis points from the pre-Brexit close on Thursday, while the benchmark 10-year yield declined 28 basis points. “If this was all the rate pressure we got, large-cap bank EPS would be down 1-6%,” Graseck and team wrote. “But LC bank stocks are down a larger 6-16% since Thursday, June 23 close.” To be clear, Graseck isn’t arguing the Fed will cut rates. Bets that it will cut have risen since the Brexit vote.