Stock Market Alternate Reality Expands in Bank and Energy Rally

(Bloomberg) -- On a day in which oil fell, interest rates slipped and measures of consumer borrowing flattened, stock traders were treated to rallies in energy companies, banks and consumer stocks.

Just another day in the 2020 market, where gaps keep widening between economic data and investor sentiment, helped by the Federal Reserve. Optimism that businesses will survive the recession and reopen is drowning out everything else, even buoying retail stocks ahead of Friday’s job report. Meanwhile, energy production companies rose 2.5% and financial stocks rallied 2.2% even as 2- and 5-year Treasury yields hit record lows.

The “market has gotten away from reality, but nobody is in a rush to sell into it because of the massive Fed liquidity in the system,” said Michael O’Rourke, JonesTrading’s chief market strategist. “The market is building very high expectations for reopening that are unlikely to be met in the next few months.”

Shares of consumer services companies like cruise lines and hotels closed 3.2% higher on Thursday, outpacing the broader S&P 500’s 1.2% gain. The stocks rallied even after a report that U.S. consumer borrowing in March unexpectedly dropped by the most since 2010, reflecting a record downturn in credit-card debt outstanding as the coronavirus caused shopping to grind to a halt.

A similar decoupling could be seen in the oil market, where companies that produce the commodity rose even as crude dropped 3%. While production cuts put in place on May 1 have helped boost producers, the outlook for such companies remains grim, according to Sit Investment Associates.

“Oil prices go up once everyone starts turning their valves off because if you have nowhere else to put oil, you shut off the valves and it gets announced as a production cut,” Bryce Doty, senior portfolio manager at the firm. “If you’re an energy company and you shut your valves off, how are you going to make any money?”

Financial companies and Treasury yields also moved out-of-sync as financial stocks retraced part of a five-day slump. Rates on 2-year Treasuries sank to a record low of 0.1388% Thursday as traders began pricing in the possibly that the Fed will cut its policy rate below zero by next year. While a flattening yield curve and negative rates are headwinds for banks’s profitability, the hope of a successful reopening is overpowering those concerns.

“Long story short, financials are a levered play on reopening going well or not, regardless of what rates do,” said Dennis DeBusshere, Evercore ISI strategist.

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