S&P 500 nurses recovery as retail flows shift from equity to silver markets

• The S&P 500 is seeing solid gains on the day currently up around 1.5% on the day.
• Retail investor focus appears to have, in large part, shifted to precious metals markets from equities.
• Stimulus hopes are likely also helping the improvement in sentiment.

The S&P 500 is seeing solid gains on the first trading day of February, currently up around 1.5% on the day. The index still trades around 2.5% below last week’s peak’s and is still some way off the 3800 level. Other major indices are also performing well, with the Nasdaq 100 doing the best, up 2.4% on the day (some analysts suggest this may be because the index typically attracts greater retail flow) and the Dow slightly lagging, up 0.7%.

Driving the day

Reddit coordinated retail investor flows into a basket of stocks that have over the past years been popular hedge fund shorts appear to have eased, with focus now shifting to retail investor flows into the silver market (spot silver prices, silver futures, major silver ETFs and silver mining stocks all surged for a third day on Monday).

This shift in focus appears to have calmed equity market nerves somewhat; while the huge short-squeezes seen in stocks last week put a number of hedge funds on the verge of bankruptcy, thus presenting some risk to broader market stability, consensus appears to be that a short-squeeze in silver markets presents much less of a risk to broad financial stability.

Meanwhile, stimulus hopes are likely also contributing to the upbeat tone in US equity markets; 10 Republican Senators are scheduled to meet with US President Joe Biden later on Monday to discuss a counter proposal on fiscal stimulus. The group of Senators is proposing a $618B package, which is well short of the $1.9T Biden plan. However, the Republican plan would include further stimulus cheques of $1000, as well as an extension of Federal unemployment insurance benefits at $300 per week through June this year. There is also $20B for schools and $20B for childcare. Though the offer is far lower than what the Democrats want, markets may see the offer as a 1) a good starting point for negotiations and 2) a sign that maybe these Republicans would accept an offer more palatable to the Democrats of close to or just above $1T.

Elsewhere, ISM Manufacturing PMI data for January did not trigger much of a reaction; the index came in at 58.7, a little below expectations for a reading of 60 but still a very strong number, indicating that manufacturing activity continued to grow at a healthy pace in January. The New Orders subindex dropped slightly to a still-strong 61.1 from 67.5 in December and encouragingly, employment rose to 52.6 from 51.7, boding well for the manufacturing employment component of Friday’s official NFP data release. Finally, the Prices Paid subindex continued its rise, hitting 82.1, up from 77.6 in December, its highest level since April 2011.

As goes January, so goes the year

“As goes January, so goes the year” says the old Wall Street adage. Thus, with January over, it's that time of year again that stock market investors go over the number and ask, is there any truth in this statement?

DataTrek Research co-founder Jessica Rabe describes the S&P 500's 1.1% decline in the first month of 2021 as a “modestly worrisome sign”; she cites the fact that since 1980, when the S&P 500 gained in January it went on to have a positive year 83% of the time with an average 15.5% gain. Conversely, the index only gained in 63% of the year when it had a negative January, with an average gain of just 2.2%.

Rabe seems fairly positive on the outlook for this year, however; While equities may not have the tailwind of falling interest rates this year they should have earnings leverage coming off the bottom of a cycle, potentially enabling an average rest-of-year return of 5% plus, she writes.