S&P 500 subdued under 4800 ahead of Fed minutes as growth to value rotation continues

• The S&P 500 is a tad lower but trading within recent ranges under 4800 ahead of the Fed minutes release.
• Growth continues to underperform value, meaning the Nasdaq 100 is performing poorly whilst the Dow is holding up better.

US equities are mixed in the run-up to the release of the minutes from the hawkish December Fed meeting at 1900GMT on Wednesday. The S&P 500 is trading marginally softer just under 4790 but continues to trade within recent 4760-4820 ranges. The tech/growth stocks continue to underperform, even though long-term US bond yields are taking a breather from their recent run of gains. The Nasdaq 100 is as a result lower by a further 0.5% on Wednesday and trading in the 16.2K region having earlier tested 16.1K. The Dow, meanwhile, continues to outperform amid an underlying bid in “value” equity sectors such as energy, industrials and materials. The index is up about 0.25% on Wednesday again a test of the 37K level (which would mark fresh all-time highs) is highly possible.

So-called value stocks continue to perform well in wake of recent upside in long-term bond yields which seems to have signalled positivity about the state of the US economy and its outlook for 2022 and beyond. “Value”, sometimes also referred to as income-generating stocks or cyclical stocks, disproportionately derive their valuation from current earnings rather than expectations for future earnings growth. That means their price is more sensitive to perceptions about the strength of the economy (which long-term bond yields encapsulate well).

A much stronger than expected estimate of the change in private US payrolls in December from ADP failed to impact equities, or bonds or FX markets for that matter. Markets seem much more focused on the upcoming Fed minutes release. Recall that in the December meeting, the US central bank doubled the pace of its QE taper and indicated three rate hikes were possible in 2022. The minutes should shed more light on the thinking behind this decision, as well as on opinions on things that are yet to be decided/announced, such as the Fed’s plans to eventually reduce the level of its bond holdings.