S&P 500 bounces above 4580, driven by out-performance in cyclical names

• The S&P 500 has bounced over 1.0% higher on Monday driven by gains in cyclical stocks.
• Growth names have performed comparatively worse, with the Nasdaq up less than 0.5%.

The S&P 500 has seen a decent bounce this Monday and currently trades higher by over 1.0% on the session around the 4580 level, as investors continue to buy the dip in light of the index testing its 21-day moving average at 4525 last week. Economically sensitive “cyclical” stocks outperformed on Monday, with the S&P 500 value index rallying 1.8%. That compares to a comparatively downbeat performance for the US “growth” sector, which rose just 0.1%.

Value stocks were bid higher as traders bet that the US economy would perform better than feared in 2022 as the tone of news regarding Omicron improved over the weekend. There was further commentary from South African health officials pointing out that Omicron infection appears to be associated with comparatively mild symptoms versus past variants. Value stocks also performed better as a rise in US bond yields undermined the appeal of duration-sensitive growth stocks. Growth stock valuation is disproportionately based on expectations for future earnings growth rather than present earnings, leaving valuations more vulnerable to a rise in opportunity cost (i.e. in bond yields).

As a result of the above divergence, the Dow has put in a strong performance, gaining over 1.5% to reclaim the 35K level, while the Nasdaq 100 is only up about 0.3% and just above 15.7K. Equity markets look set to remain sensitive to pandemic-related headlines in the run-up to the new year. As infection rates continue to pick up in the US to match what has happened in Europe over the last few months, a trend that is likely to also be accelerated by the spread of the highly transmissible Omicron variant, traders ought to be on watch for the risk of potential sporadic lockdown reimpositions across the US. This presents a downside risk to growth in particularly Q1 2022.

US macro data will also be worth keeping an eye on this week. The most interesting data points will be October JOLTs job opening on Wednesday, weekly jobless claims on Thursday and November Consumer Price Inflation and preliminary December University of Michigan Consumer Sentiment data on Friday. The Fed is now in blackout ahead of the 15 December monetary policy announcement, but members will be keeping a close eye on the inflation data in particular.