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  • The S&P 500 is grinding higher and now back above the 3900 mark.
  • Positive vaccine news and dovish Fed speak is supporting equity markets.
  • Value continues to outperform growth amid ongoing concern about rising long-term bond yields.

US equity markets have picked up where they left off in the second half of Tuesday’s session and continue to grind higher, with the S&P 500 up about 0.8% on the day and has now reclaimed the 3900 level, marking a now more than 100-point turnaround from Tuesday’s low. Having recovered more than 3% from Tuesday’s lows, a further 0.8% rally required to get back to all-time highs at 3950 does not seem too far-fetched a goal for the end of the week. The Dow is seeing an even stronger performance, up 1.0%, while big tech continues to struggle amid rising yields, meaning the Nasdaq 100 is up just 0.15%.  

Positives news helps power recovery back to all-time high levels

Positives news on vaccines, falling Covid-19 infection rates, strong housing data and more dovish Fed speak are giving equity market investors plenty of reasons to buy on Wednesday. Starting with positive vaccine news; the FDA published a positive document on the Johnson & Johnson vaccine, teeing it up for EUA. The White House says it is ready to rollout the vaccine immediately once FDA approval has been granted. This comes on the back of news that the White House had managed to secure 100s of millions of additional vaccine doses for delivery in the coming weeks from AstraZeneca and Pfizer/BioNTech. Subsequently, the White House Covid-19 vaccine coordinator said that the vaccination rate is likely to accelerate markedly in the coming weeks.

Turning to falling infection rates; the US Centre for Disease Control said that the average daily death toll due to Covid-19 had declined 35% WoW, while cases had dropped around 5% WoW to around 64K per day in its latest update on the state of the outbreak. An accelerating vaccination drive combined with falling infection rates continues to be a bullish combination for stock markets.

Meanwhile, Fed Chair Jerome Powell has finished the second and final day of his semi-annual testimony before Congress. As expected, his message on Wednesday was much the same as that on Tuesday and was resolutely dovish; though the outlook for the US economy might have improved markedly in recent weeks, the Fed is still a long way from its goals, Powell was eager to impress. Seemingly keen to hammer home the message that the Fed will be on hold for a very long time, Powell dovishly noted that it may take more than three years to attain its inflation goal. Meanwhile, he reiterated that bond-buying will continue at the current pace until actual data shows that the economy is moving closer to the Fed dual inflation/employment mandate goals.

Fed Vice Chair Richard Clarida, also speaking on Wednesday, delivered a very similar message and, following in Powell’s footsteps on Tuesday, implied that he is not worried about the recent rise in US borrowing costs; he said he sees asset market pricing as consistent with expectations for robust growth. Elsewhere, another influential FOMC member Lael Brainard was on the wires; she was also dovish, saying that monetary policy will continue to provide support by keeping borrowing costs low.

Looking ahead, stock markets look set to remain underpinned by positive vaccine news and assurances of continued central bank support. Focus is likely to turn back towards the theme of US fiscal stimulus in the coming days/weeks, with the House set to vote in favour of US President Joe Biden’s $1.9T fiscal stimulus package and chatter already starting regarding Biden’s follow up “recovery” package, which could potentially invest up to $3T in US infrastructure. This is likely to be an equity market positive.

Value continues to outperform growth

The “post-Covid-19 reopening” trade remains evident in US equity markets, as the S&P 500 value index (up more than 1.5%) outperforms the S&P 500 growth index (up around 0.5%). The growth to value ratio, which peaked at 2.172 in September 2020, has now slipped back to 1.928 and has taken a beating in recent weeks; over the same period of time, the yield on the US 10-year bond has risen from about 0.7% to near 1.4% and the yield on the 30-year bond has rallied from around 1.4% to close above 2.2%. High price to earnings (P/E) ratio stocks have suffered from a disproportionately larger multiple contraction amid rising long-term interest rates compared to low (P/E) ratio stocks. Since September, the S&P 500 tech index (which disproportionately contains stocks with high P/E ratios) is up just 5%, versus the S&P 500 energy and financials indices (both containing predominantly low P/E ratio stocks), which are up 33% and 42% respectively.

Whilst rising rates is one factor, stock market investors are also anticipating a shift in consumer spending patterns towards socialising and out-of-home experiences (which is set to benefit tourism, hospitality and leisure sector company earnings), as they spend less time at home once the pandemic subsides (hurting stay-at-home stocks such as Big Tech and home-delivery stocks). This is another headwind for S&P 500 growth stocks, which primarily fall into the latter category.

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