Note: Our daily “S&P 500 Outlook, Forecast, and Trading plan for Monday, 01/07” will be posted around 8:30am EDT, Monday.
THE GIST (“THE WHAT”)
Easing of recession jitters following a surprise big jump in December jobs data, lifted sectors across the board with a wild price action. The worst performing sectors last week were the best performers in today’s relief rally. Federal Reserve Chairman Jerome Powell’s softened tone towards future interest rate hikes further fueled the rally. Energy stocks also rallied on the back of an uptick in oil prices on optimism ahead of the U.S. – China trade talks.
Opening the session significantly higher, the index maintained the upward momentum to register the day’s high at 2538.07. Finding resistance at the short-term technical level of 20 DMA (now at 2538.91), index held on to the gains thereafter to close near session highs at 2531.94, up a whopping 84.05 points and gaining a solid 3.43% over the previous session’s close.
The first week of this new trading year closed with a 1.86% gain helped by the Fed-induced rally. It will be interesting to see if today’s rally follows through over the coming sessions. Extreme volatility continues to remain the name of the game with several unresolved issues still weighing down on the investor sentiment.
THE DETAILS (The “How & Why”):
Friday’s NonFarm Payrolls data indicated that the U.S. economy added 312,000 jobs in the month of December, far more than the expected figure of 176,000. A surprise jump in employment data, coupled with a faster-than-expected wage growth eased fears of an imminent recession.
Further soothing concerns of a policy mistake by the Federal Reserve were dovish comments by Jerome Powell, reiterating that the inflation remains muted and that the central bank will be flexible and keep a closer watch on the economic data before further increasing the benchmark interest rate or aggressively shrinking its balance sheet. Although some analysts believe investors might have overreacted to his comments.
Chipmaker stocks, big-tech and FAANG stocks erased some of their recent weaknesses to boost the broader Technology and Communication Services to lead the broader index higher by 4.40% and 4.07%. Advanced Micro Devices Inc. and Netflix Inc. were the top gainers within the sector, rising 11.44% and 9.72%. Facebook Inc., Amazon.com Inc. and Alphabet Inc. rose 4.71%, 5.01% and 5.13%, respectively. Apple Inc. also gained 4.27%, bouncing back from previous session’s steep declines after issuing a rare guidance cut.
Mattel Inc. was the best performer of the session, coming off its recent steep decline and soaring 12.30% to lead the broader Consumer Discretionary sector higher by 3.50%. Materials, Industrials and Energy sectors were the other notable gainers of the session, up 3.91%, 3.85% and 3.58% respectively, benefiting from a sharp decline in the U.S. dollar index. Oil prices also rose on optimism ahead of U.S. – China trade talks next week.
Investors gave up safe haven bonds in favor of riskier equity assets on signs of a healthy economy, lifting bond yields higher in their best day in over two years. The 10-year yield settled at 2.67%, up 11 basis points, boosting sentiments within the Financials sector to close the session solidly
higher by 3.28%.
While defensive sectors also benefited from the broad-based relief rally, gains within these sectors were relatively muted in today’s risk-on price action. Health Care, Consumer Staples, Utilities and Real Estate all closed the session higher by 3.00%, 2.15%, 1.48% and 1.03% respectively.
Investors will be keenly looking forward to the trade talks between the U.S. and China early next week hoping for some respite from their year-long trade dispute. After a weak ISM data and a surprise jump in December jobs data, Friday’s CPI inflation report will be the key focus of investors, looking for signs of any rise in inflation.