S&P 500 recovers towards 4600 as US equity market conditions remain choppy, unpredictable

• US equities gained on Thursday, despite a lack of fresh fundamentals, as market conditions remain choppy and unpredictable.
• The S&P 500 recovered from the low 4500s to close to the 4600 level ahead of the close.

US equity market conditions remained for the most part choppy and unpredictable on Thursday. The S&P 500, which sold off sharply into the Wednesday close and ended the session under the 21-day moving average in the 4510s, bounced in early Thursday trade and now trades nearly 1.7% higher on the day at 4590. The index has now pared its on-the-week losses to just 0.3%, though still trades some 3.5% below last week’s record peaks close to 4750.

The Nasdaq 100 saw comparatively modest gains of under 1.0%, with the index bouncing from lows under 15.8K to back above 16.0K. Short-end and real yields continued to rally, reducing the duration-sensitive tech sector’s tailwinds. The index continues to trade about 4.0% below record levels printed back on 22 November. The Dow was up more than 2.0%. The CBOE S&P 500 Volatility Index (VIX) was down nearly 4.0 points to close to 27.0, more than 5.0 points down from Wednesday’s 11-month highs above 32.0.

Driving the day

There wasn’t any one specific reason for the upside on Thursday. Omicron and uncertainty about the influence that its global spread will have on the global economic/monetary bank policy outlook remains the dominant market theme. On that front, there hasn’t been much fresh information on the virus, aside from more data from South Africa that points to its high transmissibility and ability to partially evade vaccine/natural immunity (both known qualities of the variant).

The equity bulls remain hopeful that the severity of symptoms caused by infection is a lot milder than other variants, but it remains far too soon to say for sure at this point. Even if the illness is as severe, most suspect vaccines/part infection will still offer enough protection to avoid March 2020-style lockdowns.

Some pointed to the recent string of strong US macro data releases as behind the rally on Thursday. Initial weekly jobless claims and November challenger layoffs on Thursday were both better than expected after Wednesday’s strong November ISM Manufacturing PMI survey and ADP employment change estimate. The data suggests Friday’s November labour market report, the most important data release of the week, should show strong gains in employment.

But strong US data endorses the Fed’s increasingly hawkish view of the economy, something which some investors have said has added another layer of uncertainty to the market right when it didn’t need it (due to Omicron). Recall that earlier in the week in his testimony before Congress, Fed Chair Jerome Powell was bullish on growth and the labour market, expressed concern about high inflation, and, thus, hinted towards a faster QE taper. Fed speakers on Thursday endorsed this viewpoint. A strong NFP number on Friday should solidify market expectations for a faster pace of taper from January.