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The stock market had a rough start yesterday, but the roots of its eventual turnaround effort were planted when the S&P 500 snuck below its closing level on November 5 (Election Day). The round-trip move, which amounted to a 5.4% decline from the all-time high reached on December 6, seemed to ignite buy-the-dip interest that filtered through the mega-cap space.
Notably, the broader market wasn't languishing as much in yesterday's early action, as losses were concentrated in the mega-cap and small-cap spaces. At their lowest point, the Vanguard Mega-Cap Growth ETF (MGK) and Russell 2000 were down 1.8% and 1.4%, respectively, but ended the session down 0.5% and up 0.2%, respectively. The Russell 2000 for its part had dipped just below its 200-day moving average at its low before buyers emerged.
The market cap-weighted S&P 500 logged a 0.2% gain after being down as much as 0.9%, yet the standout was the equal-weighted S&P 500, which exhibited relative strength throughout yesterday's trade and ended with a 0.8% gain.
Today's open is slated to follow a more upbeat course, aided by some positive carryover momentum, a Bloomberg report suggesting Trump officials are considering a plan to increase tariffs at a more gradual rate of 2-5% per month, and a Producer Price Index (PPI) for December that was better than feared.
Briefly, the Producer Price Index for final demand increased 0.2% month-over-month in December (Briefing.com consensus 0.3%), leaving it up 3.3% year-over-year versus 3.0% in November. Excluding food and energy, the index for final demand was unchanged month-over-month (Briefing.com consensus 0.2%), leaving it up 3.5% year-over-year versus 3.5% in November.
The key takeaway from the report is that the better-than-expected monthly readings have been clouded by the less inspiring year-over-year readings, as well as the understanding that inflation at the wholesale level moved in the wrong direction in 2024 (versus 2023) and remains elevated relative to the Fed's 2% inflation target.
There was some whipsaw trading in the Treasury market following the report, but yields are little changed from yesterday's settlement. The 2-yr note yield is down two basis points to 4.38% and the 10-yr note yield is down one basis point to 4.79%.
Equity futures enjoyed some knee-jerk buying interest that was energized by the friendlier month-over-month readings, helping to set the stage for a higher open today.
Currently, the S&P 500 futures are up 30 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 139 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 150 points and are trading 0.4% above fair value.
The strength of the legs under this rebound effort may just hinge on how far the Treasury market lets things run by remaining calm and how much conviction there is in the mega-cap rebound trade. Both are in good shape at the moment, which will lead to a better shape in the opening action than what was seen yesterday.
