Mike Santoli’s market notes: S&P 500 passes rates stress test, returns to a record

Published Thu, Mar 11 20211:37 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market is back in gear and the grab for risk has resumed. A month ago Friday, the S & P hit a record high before a 5% pullback led by expensive/speculative growth stocks, with a spurt in bond yields as the handy excuse. The turbulence allowed the most overheated parts of the market to come off the boil, overconfident sentiment to moderate and the entire tape get stress-tested for a rates/inflation scare. For sure, a pause in the Treasury sell-off (which sent yields higher) has allowed stocks to regroup and for growth and cyclicals to catch a firm bid simultaneously, as some of us have been tentatively anticipating for a little while now. This means more flight from bonds could cap/undercut the equity rally but Treasuries still act like too many are short for the moment. And the rest of the world's central banks are more explicitly looking to restrain yields. Not to say all concerns have now faded away, but the underlying supports of surging GDP/profit growth, reflation of real assets, a Fed allowing the economy to run hot and sturdy credit markets have reasserted themselves. The sharpest talking points for skeptics have been generally high valuations, unhinged speculation in momentum/unprofitable tech, SPAC silliness and too much optimism. Point by point: -The forward P/E for the S & P is down to 22x from 23x nine months ago even with the index up by close to 25%, because forward profit forecasts keep ramping. -The speculative themes – ARK, cloud, IPOs, SPACS – all fell at least 20% in a few weeks from high to low, draining some froth. -And sentiment/positioning has become less extreme. CNN Fear/Greed is back to the neutral zone. And the tactical investment advisors in the NAAIM survey have retrenched dramatically from leveraged long to below-average equity exposure. Then again, this week's rally has already turned pretty grabby and chase-y. Small-cap indexes are getting blindingly overbought again. They're trying to run solar stocks back up. Not hard to imagine the S & P extending this breakout, the story stocks regain momentum and we'd be right back to worrying about the silly stuff getting out of hand again. All with the S & P 500 nearing a round number at 4,000, the 12-month gain about to turn acutely gaudy, a stock-to-bond rebalancing wave set to roll and the broad cycle work looking at prior mega-rallies of major lows (1982 and 2009) suggesting an early-2021 minor top with some downside chop makes some sense. Need to see all sides. And broadly speaking, large-cap tech could still be considered in mere bounce mode rather than poised to participate fully in the rally again. Near-record inflows into junk-bond funds in recent days and the $100 billion in orders for Verizon's $36 billion debt deal that will fund its payment to the US government for rights to wireless spectrum show the ceaseless bid for credit. This is keeping corporate balance sheets flush and supporting equity valuations. Sure, it's sowing the seeds of bad creditor outcomes down the road in certain areas, no doubt, but that's not this year's business. Market breadth is very strong. The equal-weight S & P is now up more than 10% year to date. VIX is getting smoked, now in the 21s. We'll see if it skirts 20 again on successive S & P 500 index highs.

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This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.