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  • It was a solid day on Wall Street, with all major indices gaining and the Dow hitting 32K for the first time.
  • The macro backdrop remains positive, amid pandemic, fiscal stimulus and dovish central bank optimism.
  • Rotation from growth, momentum and high P/E ratio stocks into value names continued on Wednesday and GME shares also surged.

It was a solid day for US equity markets, with all three major indices gaining throughout US trading hours. The S&P 500 finished the day with gains of 1.18% and reclaimed the 3900 mark to close in the 3920s, only about 0.6% away from last week’s intra-day all-time highs. The Dow closed 1.39% higher, having broken a key barrier of resistance at 31,650 to advance to fresh intra-day all-time highs around 32,000. The Nasdaq 100 0.81% higher. That means the three major indices have recovered 3.2%, 2.6% and 4.3% from the lows hit at the start of Tuesday’s session. Talk about buy the dip!

Macro backdrop remains positive

Wednesday’s gains were not really surprising given that the macro backdrop remains overwhelmingly positive for US equity markets.

1) Pandemic news is good – The FDA looks set to give Johnson & Johnson EUA, and the White House is primed and ready to start distributing the vaccine, which the Biden administration is confident will further accelerate the US’ already robust vaccine rollout.

2) Central bank news is good – A second day packed full of Fed speak, this time not just from Fed Chair Jerome Powell, but also Vice Chair Richard Clarida and influential permanent voting FOMC member Lael Brainard, all three of whom stuck to the bank’s dovish script; though none have expressed concerns about the recent rise in US borrowing costs, all have been keen to emphasise that the US remains a long way from the bank’s dual mandate goals and both Powell and Clarida sounded dovish on inflation, pushing back on concerns about overheating.

3) Fiscal stimulus news is good – Not much by way of new updates on stimulus on Wednesday, but the US House is expected to vote in favour of US President Joe Biden’s $1.9T “rescue” package at the end of the week. Moreover, there is already a lot of chatter regarding the follow up infrastructure-focused “recovery” package, which could be up to $3T in size and is said to command pretty decent bipartisan support, given that taking US infrastructure to the next level is seen by many on both sides of the political aisle as crucial if the US is to outcompete China in the 21st Century (which is a key national security goal of both the Republicans and Democrats). 

Rotation

Rotation out of growth, momentum and high price to earnings ratio stocks into value names continued on Wednesday; the S&P 500 value index finished the session 1.47% higher versus more modest 0.83% gains for the S&P 500 growth index. Smaller cap stocks performed better than large-cap stocks, with the Russell 2000 index finishing the session 2.38% higher and the equal-weighted S&P 500 outperforming the S&P 500 to finish the session 1.54% higher.

Stock market rotations continue to tell two stories; 1) investors betting on those stocks that have the most to gain from the end of lockdowns and from more US government fiscal stimulus at the expense of those “stay-at-home” stocks that benefitted initially from the lockdown and 2) the impact of rising long-term interest rates; according to finance theory (and clearly this is the case in real life as well) higher price to earnings ratio stocks are more exposed to increases in long-term interest rates than low.

GameStop short-squeeze 2.0?

GameStop shares rose more than 100% on Wednesday, with the vast majority of the gains coming in the final hour and a half of trade. News that the company’s CFO seems to have reignited some interest in the stock on Reddit boards. It will be a tough task to trigger another short-squeeze, however, with short interest in GME shares as a percentage of the stocks overall flout now under 40%, versus this time last month, when it was over 140%. Still, that might not stop the Reddit army from trying again and the stock is up a further approximately 80% in after-market trade.

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