S&P 500 Rallies Toward Record as Small Caps Surge: Markets Wrap

(Bloomberg) -- Investors poured into financial assets that benefit from a stronger economy after Democrats looked set to take control of Congress, potentially unleashing a torrent of federal spending to revive growth.

The S&P 500 rallied toward an all-time high, with banks and commodity producers leading the charge, amid volume that was 35% stronger than the average of the past 30 days. A gauge of smaller companies jumped about 4.5%, while some of the shares that powered the equity surge from March lows such as Apple Inc. and Amazon Inc. underperformed. The Dow Jones Industrial Average was also on pace for a record as 25 of its 30 blue-chip stocks advanced.

Democrats claimed one of the two Senate seats contested in Georgia and led in the other tight race. Two wins would give President-elect Joe Biden’s party control of Congress and smooth the path for some of his spending policies. That’s fueled bets that increased stimulus will boost the economy and spark inflation. The 10-year Treasury yield climbed past 1% for the first time since March, and the dollar fluctuated.

“The growth-into-value rotation may be reinforced after the results of the Georgia Senate election amid the prospect of a higher fiscal stimulus bill and steeper yield curve, which would benefit banks and other non-tech companies,” David Bahnsen, chief investment officer of the Bahnsen Group in Newport Beach, California, wrote in a note to clients.

Congress passed at year’s end a $900 billion spending deal to bolster an economy showing signs of slowing as the raging virus prompts stricter lockdowns across the country. The number of employees at U.S. businesses unexpectedly declined in December for the first time since April, underscoring the ongoing labor-market fallout from the pandemic. The figures preceded the monthly jobs report on Friday, which is projected to show weaker payroll growth.

U.S. 10-year breakevens -- a market gauge of inflation expectations over the next decade -- topped 2% this week for the first time since 2018, having gained in each of the last three months. While the pandemic is still raging with the rollout of vaccines in the early stages, the risk is that further signs of inflationary pressure could start prompting bets on Federal Reserve rate hikes. Minutes from the December policy meeting are due at 2 p.m. Washington time.

For Matt Miskin, co-chief investment strategist at John Hancock Investment Management, the ball will be in the Fed’s court next and how policy makers will react to this evolving political backdrop.

“They have been wanting more fiscal support, well now they have it, and it is coming with a cost -- higher interest rates based on Treasury yields rising,” Miskin noted. “We will see what the Fed’s pain threshold is for higher Treasury yields in the first half of 2021. The tug-of-war between monetary and fiscal policy will be key to markets. While the fiscal side is looking more promising based on the results today, monetary policy may take a step back.”

Elsewhere, Bitcoin jumped to another all-time high as extreme swings continued to buffet the world’s largest cryptocurrency. And the New York Stock Exchange is proceeding with a plan to delist three major Chinese telecommunications firms, its second about-face this week, after U.S. Treasury Secretary Steven Mnuchin criticized its shock decision to give the companies a reprieve.

These are some of the main moves in markets:

Stocks

• The S&P 500 gained 1.3% as of 1:28 p.m. New York time.
• The Stoxx Europe 600 Index climbed 1.4%.
• The MSCI Asia Pacific Index fell 0.2%.

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%.
• The euro was little changed at $1.2304.
• The Japanese yen weakened 0.4% to 103.17 per dollar.

Bonds

• The yield on 10-year Treasuries jumped nine basis points to 1.04%.
• Germany’s 10-year yield climbed six basis points to -0.52%.
• Britain’s 10-year yield rose three basis points to 0.243%.

Commodities

• West Texas Intermediate crude advanced 1.8% to $50.81 a barrel.
• Gold lost 2.2% to $1,906.91 an ounce.

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