U.S. Markets Rise on Vaccine Optimism

Mondays have been good for vaccine news lately. We got more of it this morning from AstraZeneca and Oxford University, in addition to Regeneron Pharmaceuticals. That set U.S. equity markets back into recovery rally mode as the DJIA and the S&P 500 surged behind energy and transportation stocks. Big Tech stocks slid, as has been the pattern during the vaccine rallies, but the Nasdaq managed a small gain. 

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The Biden administration is reportedly tapping former Fed Chair Janet Yellen to be its Treasury secretary. A well-respected economist who worked across the aisles of Congress during the Obama administration, Yellen will be the first woman to lead the Treasury Department. She was already the first female Fed chair, so she will be continuing her shattering of glass ceilings if she takes the position. 

Speaking of shattering, shares of Tesla (TSLA) are making a lot of noise since it was announced it will be joining the S&P 500 next month (more below). The stock hit an all-time high again today and is up 680% year-over-year.

Long Equities, Short Bonds

As we said on Friday, the rotation out of cash, gold, and government bonds since the election has been record-breaking. You don't necessarily see it in the major U.S. equity averages because the money has been moving into small cap and value stocks, and they aren't big enough to move the market-weighted indexes, but the money flow is real. It's also cool to look at it in the Arbor Research chart above.  

It's even more dynamic when we look at the impressive market breadth of the recent rally. According to Oppenheimer Research, the percentage of NYSE stocks above their 200-day average peaked at 82% last week, its highest tally since May 2013. In case you are wondering, May 2013 was the beginning of a bull market breakout that lasted until the end of 2015 

There are plenty of risks that could prevent that from happening again, to be sure. But you cannot ignore the breadth of the rally or what usually happens after we see that kind of strength.

Addition by Addition

The announcement last week that Tesla will be included in the S&P 500 in December was the worst-kept secret in the stock market. It should've happened months ago given Tesla's beefy market cap, but it's finally happening and the stock is racing ahead.  

Usually, a stock gets a nice 5% to 10% bounce on average when it is included in a big index like the S&P 500, but shares of Tesla are up 28% since the announcement. Index membership matters because there is about $11 trillion indexed or benchmarked to the S&P 500. Passive mutual funds and ETFs that track the S&P 500 will have to buy tens of billions of dollars of Tesla stock, which is why we see the big move in price. 

Who's Getting Kicked Out?

TechnipPMC (FTI) is the likely S&P 500 component to be shown the door to make room for Tesla. The oil and gas company that is domiciled in France has seen its shares tumble 59% year-to-date, along with the rest of the sector. It's actually up 6% since the S&P 500 Index Committee announced Tesla's addition on Nov. 16, but so are almost all energy stocks. Expect it to come under pressure as the new index reconstitution takes place in a couple of weeks. 

As for Tesla, given the run-up in its stock this year (it's only up 570%), it will enter into the S&P 500 as the eighth largest component of the index.