• US stocks recovered aggressively into the close from an early session rout that saw the Nasdaq 100 as much as 3.5%.
  • The S&P 500 bounced at the 3800 level, with reassurance of continue accommodation and stimulus headlines helping.

It was the definition of a turnaround Tuesday for US equity markets; the Nasdaq 100 index nearly managed to recovery back to flat and closed the session with losses of just 0.2%, compared to intra-day worst levels where it was more than 3.5% lower. The S&P 500 recovered from intra-day losses of around 1.8% to finish the session with gains of about 0.2% (thus snapping a five-day losing streak), having bounced at 3800, while the Dow closed up 0.1%.

The initial downside was driven by growth stocks, with the steep sell-off observed in the likes of Tesla and Apple, as well as in the chipmaking sector, as investors instead bought into value stocks (such as banks) and other stocks that stand to benefit from economic reopening. In the end, the S&P 500 value index rose 0.45% versus a 0.17% drop in the S&P 500 growth index. Apple appears to have been helped from lows on comments from CEO Tim Cook, who said the company plans to increase its annual dividend.

In terms of the S&P 500 GICS sectors; energy led the way, up 1.61% on the day despite comparatively modest gains in crude oil markets, while consumer discretionary lagged, ending the session down 0.5%. Downside in Tesla can almost exclusively be to blame, with downside in Bitcoin dragging TSLA shares with it (after Tesla announced a $1.5B investment in bitcoin just over two weeks ago).

Driving the day

Dip buying equity market bulls were given the best opportunity that they had seen in weeks on Tuesday and it very much looks like they took advantage off it. Jitter about the US economy overheating and prompting a Fed monetary policy tightening response, jitters about higher US bond yields and jitters about frothy valuations were all thrown around as explanations for the early downside on Tuesday.

While it is difficult to pinpoint exactly what caused the pre-market/early US trading session sell-off, a number of positive developments can be pointed to as reasons why stocks managed to recovery so aggressively from lows;

1) Fed Chair Powell might not have come across as overly concerned about the recent rise in US bond yields, but he maintained his resolutely dovish stance on the path of Fed policy going forward; the Fed wants to see substantial progress towards its inflation and employment goals before tapering QE and wants to definitively reach its dual mandate before hiking interest rates. Powell made it clear to the market that the Fed is still a long way from achieving these goals, thus reassuring investors that easy policy is here to stay for the foreseeable future. When asked what his message to markets is, he referred to the fact that unemployment is currently at 10% (i.e. to impress to markets that the Fed is still a long way from its goals and thus a long way from tightening).

2) US President Joe Biden pumped stimulus hopes in the final hours of trade, saying he thinks his stimulus bill is going to get passed by “a lot”. Note that the House is likely to soon vote on the President’s $1.9T “rescue” package and is expected to pass it and send it to the Senate. Congressional leaders hope to pass the bill into law by mid-March. It also seems as though the Democrats will push to pass President Biden’s likely multi-trillion “recovery” package, which is focused on infrastructure investment, in the subsequent months. According to political commentators, infrastructure spending commands decent bipartisan support.

3) News that a bipartisan group of lawmakers is planning on meeting with Biden on Wednesday to discuss supply chain issues, including with semiconductor chips, appeared to boost the lagging semiconductor sector, which had been dragging the major US indices down.

More broadly, the macro backdrop for the US economy remains bullish; recent vaccine supply news has been positive and implies that the US is on course to vaccinate all adults by the Summer, meaning a more confident and aggressive reopening is likely possible than what might otherwise have been expected. Amid this backdrop, it is understandable that equity investors continue to gobble up dips.

Credit Suisse ups S&P 500 target

Credit Suisse raised their year-end target for the S&P 500 to 4,300, the second upgrade to their target already this year. The bank noted that with 90% of Q4 earnings reported for S&P 500 companies and results beating estimates by a wide margin, the bank had to increase its full-year 2020 EPS estimate to $142.50 from $140, while increasing its forecast for 2021 EPS to $185 from $175. In terms of the logic behind the upgrade to 2021 EPS, Credit Suisse cited a reopening economy, an abundance of fiscal stimulus and continued Fed accommodation. “It is no surprise that 2021 GDP is expected to run hotter than at any time in the past 35 years”, the banks noted.