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  • The S&P 500 was not able to hit an intra-day all-time high level but did manage to post an all-time closing high.
  • Traders aggressively bought the dip when the S&P 500 dropped to 3800.
  • The Dow was weighed by underperformance in Merck after the pharma giant scrapped its failed Covid-19 vaccine development programme.

The S&P 500 was not able to hit an intra-day all-time high level but did manage to post an all-time closing high at 3853.76, up 0.32% on the day. Meanwhile, the Nasdaq 100 managed to hit intra-day and closing record highs, moving above 13,500 for the first time ever and closing above 13,400 for the first time ever to finish the day up 0.7%. Conversely, the Dow dropped back 0.12% on the day and fell back to close below 31,000.

Nasdaq 100 outperformance was driven by another strong performance for big Tech stocks, while cyclical stocks underperformed (hence the Russell 2000 closing 0.4% lower). The Dow was weighed by underperformance in Merck after the pharma giant scrapped its failed Covid-19 vaccine development programme.

Choppy price action

All major bourses saw unusually choppy price action; stocks dropped sharply shortly after the open, with the move seemingly not caused by any fundamental catalyst. Some pointed to headlines of US Senate Majority Leader Chuck Schumer saying he thinks a deal on the next round of stimulus is still four to six weeks away, though this delay ought not be 1) particularly unexpected or 2) change the economic outlook for the worse by any meaningful amount.

Others suggested that US equities might have been taking their cue/playing catch up to a more defensive bias to risk appetite being seen elsewhere. For example, major European equity bourses sold off on Monday amid a combination of lockdown, vaccine delay and travel ban concerns, something which also seemed to boost bond prices and hurt commodities and bad Eurozone data.

Meanwhile, the usual observations that the move was as a result of profit-taking with equities at/close to all-time high levels, at historically elevated valuations and ahead of a week of key earnings releases were made.

But equity traders were hungry for the dip; the S&P 500 bounced strongly at the 3800 level, as traders look ahead to this week’s FOMC meeting (where the Fed should reiterate their ultra-accommodative and equity price supportive policy stance) and preliminary Q4 US GDP growth numbers. Craig Erlam, senior market analyst at OANDA Europe, said “the risk for these markets is that, after a bumper couple of months, investors may start to wonder whether they’re looking a little frothy”.

Despite discouraging news of vaccine delays from leading vaccine makers Pfizer and AstraZeneca, it seems as though a rapid vaccine powered global economic recovery, further accelerated by loose fiscal and monetary policy (particularly in the US now that Joe Biden is President and the Democrats control Congress) remains the base for most investors which ought to support equity market valuations in the long-run.

Jefferies analyst Christopher Wood said that though US stock markets look overvalued, they still remained bullish; “for the stock market to have a real nasty unwind, rather than just a bull market correction, there needs to be a catalyst” Wood said, adding “that means either an economic downturn or a material tightening in Fed policy”. Neither was likely to occur in a hurry.