It appears a line has been drawn in the sand at $3,900 on the S&P 500 as the widely-watched index has crossed that level several times over the last month (see chart below). Thus far, the S&P 500 has been directionless since the beginning of February.
Over the weekend, I assumed Senate passage of the $2 trillion “relief” bill, and likely passage in the House this week, would have been sufficient to thrust the S&P above 3,900. However, so far, even that has not provided enough fuel to support the next leg higher. Has the market already priced this in? A “buy the rumor, sell the news” dynamic?
There appears to be a rotation out of “growth” stocks to “value” stocks (see two charts below). This would be a significant leadership change as “growth” stocks have been the major outperformer for about a decade and responsible for such a large portion of market gains.
This chart showing the performance each of growth stocks and value stocks YTD using Vanguard Growth ETF and Vanguard Value ETF as proxies.
This chart shows the ratio of the Nasdaq 100 to the S&P 500. The ratio is currently at the level of the prior peak at the height of the Dot-Com Bubble which happened to be on March 10, 2000…exactly 21 years ago today (per Liz Ann Sonders)
Throughout the last month we’ve also seen interest rates rise fairly dramatically, which puts downward pressure on extremely overvalued stocks. The commentary from pundits has been that the market is pricing in pent-up demand and reflation as states open back up from COVID restrictions thereby pushing interest rates higher. Therefore, I imagine today’s inflation report will be important, and we’ll likely see futures move on the back of that report.
On interest rates, to be clear, I do not believe the Fed will sit idly by if rates were to continue to rise. Rising rates would jeopardize this fragile, artificial bull market the Fed has built using trillions of stimulus so there will be a pain point where the Fed will step in yet again to suppress rates. There is just no way of knowing exactly where that pain point is.
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