The 1% Move Report

Wealth Management — December 15, 2020

• US stocks traded higher Tuesday as the S&P 500 rose 1.3% to close at 3,695. With the rally, the index is now up 14.4% year to date. 
• Tuesday's rally snaps a four-session streak of losses for the S&P 500. As has been the case in recent days, there were no clear or obvious catalysts to explain Tuesday's market action. That said, market attention remains on Washington as fiscal negotiations continue between Democrats and Republicans. On the monetary front, the December FOMC meeting concludes tomorrow with Chairman Powell scheduled to speak at the afternoon press conference. Outside of policymakers, COVID-19 remains in focus as markets balance the risks posed by the recent increase in COVID-19 case growth against the more positive recent vaccine developments. 
• All 11 S&P 500 sectors were higher, with Utilities (+1.9%) and Energy (+1.9%) outperforming the broader market, while Communication Services (+0.7%) and Consumer Staples (+0.2%) lagged the broader market. 
• Rates were higher across the curve, with the 10-year Treasury yield rising to 0.91% as of the 4 p.m. equity market close. Gold was 1.5% higher, while WTI oil also moved higher to nearly $48 per barrel. The US dollar weakened modestly in the trading session, as measured by the US Dollar Index.

US stocks traded higher on Tuesday as the S&P 500 gained 1.3%. After four consecutive days of losses for the S&P 500, the index recorded its first 1% daily gain since December 1. Just as there did not appear to be an obvious catalyst to explain the recent string of losses, there was not a clear driver for Tuesday's rally. Perhaps this back and forth to begin December makes sense, however, in context, as markets consolidate November's strong gains. As has been the case for much of the year, markets appear fixated on two issues: policymakers and the pandemic. On the former, negotiations are heating up this week between Democrats and Republicans over another round of fiscal stimulus, and perhaps Tuesday's rally reflects some renewed optimism that a deal can still be reached before year end. The Federal Reserve will also be in focus with tomorrow's December FOMC decision. As it relates to the pandemic, this week provides more puts and takes; on the negative side, growing COVID-19 spread has led to renewed restrictions on activity across much of the US and globe, while on the positive side vaccine delivery and administration have begun, following the FDA's first emergency-use authorization granted last week. Through it all, markets have been resilient through the first half of December, with the S&P 500 trading within 1% of its all-time high reached one week ago.

Record and unprecedented stimulus from both the Fed and Congress has unleashed a V-shaped recovery in global trade, manufacturing, goods retailing, and housing. That momentum, coupled with the resolution of the US Presidential election and much better-than-expected initial trial outcomes for COVID-19 vaccines, has lifted equity markets to new all-time highs. Although investors are correct to be concerned about index level valuations, which have reached multi-decade extremes at more than 22x forward earnings, the economic and profit dynamics in 2021 could support another 5%-10% gain to 3,900 for the S&P 500. Another round of fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth acceleration to 5%-6% real GDP, with inflation rebounding to more than 2% next year, a scenario that should support 27% year-over-year profit gains. However, optimal navigation of this burgeoning new business cycle will require care as Treasury rates are likely to move higher, creating a headwind for long-duration assets. In stocks, our preferences remain focused on quality and valuation support, attributes that remain in small caps, international stocks and cyclicals, including financials, which should benefit from the steeper yield curve. Dollar weakness is likely to continue as policy choices are debasing and relative growth outside the US becomes more compelling, supporting the case for emerging markets and commodities. In fixed income, the challenge is two-fold: Generating sufficient income, while also preserving capital, requires a diversified and active exposure, with our preference toward a mix of corporate credit (IG and HY), preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Capital preservation and portfolio hedging from equity volatility may be achieved with a combination of cash and ultra-short duration instruments, and absolute return hedge funds. Real assets like gold, infrastructure and real estate for inflation support should be bought opportunistically.

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.