Another day, another record close for the S&P 500 and Nasdaq 100 indices. That’s marks six record closes now in the last six sessions for both indices. The S&p 500 posted a gain of 0.4% to close at 4680, while the Nasdaq 100 was higher by 1.25% to close at 16.35K. The Dow posted a small loss of 0.1%, but remain above the 36K level. The CBOE Volatility Index (VIX), often referred to as Wall Street’s fear guage, remained stable just above 15.00, leaving it not far from post-pandemic lows around 14.00 set back in June.
Chipmakers saw notable gains with the Philadelphia SE Semiconductor Index surging 3.5% on the day after strong earnings from heavyweight Qualcomm (+12.7% on the day), whose business is thriving despite severe global supply chain disruptions. More broadly, tech stocks were the beneficiaries of a sharp decline in US bond yields (2s -5bps to 0.43%, 5s -7bps to 1.115%, 10s -8bps to 1.53% and 30s -5bps to 1.97%) – the major catalyst of the drop was a dovish surprise from the BoE which triggered a historic decline in (particularly short-end) UK yields, a drop that spilled across to international markets.
Remember that the valuation of many tech stocks is much more dependent on expectations for future earnings growth rather than on current earnings, more so than for many other equity sectors, thus when interest rates rise, the opportunity cost of banking on future earnings growth rises, thus weighing on the valuation of these stocks. On the other side of the coin, these also so-called growth or “duration-sensitive” names benefit when yields fall.
With yields sharply lower, the S&P 500 financials index was under pressure, dropping 1.3%. Sticking with the sectors, a sharp drop in oil prices as traders took profit on pre-OPEC+ decision long positioning (some said they didn’t want to be caught out by a US policy response to OPEC+ not lifting output by as much as they wanted) weighed on the S&P 500 energy index, though just before the close it managed to recovery into positive territory on the day and close about 0.2% higher. A number of major US oil producers have announced plans to up investment to expand production in recent days.
Stocks have had a great week thus far, the S&P 500 up 1.6% and the Nasdaq 100 up over 3.0%, with both indices now up 9.5% and 13.5% respectively from the September lows. Key to the rally in recent weeks has been a much better than expected Q3 corporate earnings season, but another major driver of the rally this week was Wednesday’s Fed policy announcement; investors had fully priced in the $15B/month QE taper announcement and cheered the Fed’s continued characterisation of inflation as largely being driven by transitory factors, as well as Powell insistence that in the bank’s base case, inflation will be coming down in mid-2022 and he is willing to be patient when it comes to interest rate hikes.
But some analysts noted that the Fed did also acknowledge that uncertainty regarding the path of the economy (with regards to both inflation and employment), which they think opens the door to a potential hawkish shift by the Fed in early 2022 if inflation remains elevated and labour market progress is strong. The Fed clearly wants to maintain the optionality to shift in a hawkish or dovish direction next year, hence why it didn’t yet announce the pace of its QE taper beyond December. For now, Fed policy is on autopilot until the end of the year, but it will be watching the data intently.
Thus, Friday’s labour market data will be an important one and will set the tone of what is to be expected for the labour market for the rest of Q4. A very strong report could raise the risk of a hawkish Fed shift in 2022 and push yields higher, which could result in equities ending the week on a sour note. The major US indices are likely due a bit of a pullback at this point anyway, those seeking to take profit might not need much excuses.
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