Wealth Management — April 15, 2021
- US stocks moved higher on Thursday as the S&P 500 gained 1.1% to close at 4,170. With the rally, the index is now up 11% year to date.
- US equities moved higher for the fifth day in the past seven trading sessions, as the S&P 500 made a new all-time high on Thursday. A number of catalysts contributed to the rally, including strong economic data this morning with higher-than-expected retail sales and empire manufacturing readings as well as lower-than-forecasted initial jobless claims. Corporate results were also in focus with first quarter earnings season underway; this week has seen a number of large-cap banks report strong results. While Thursday's data was strong, Treasuries rallied anyway with yields moving sharply lower across the long end of the curve-with the move lower in rates, large-cap growth stocks outperformed on the session.
- Nine of the 11 S&P 500 sectors finished the session higher, with Real Estate (+2.0%) and Information Technology (+1.8%) outperforming the broader market, while Financials (-0.1%) and Energy (-0.9%) lagged.
- Rates were lower across the curve, with the 10-year Treasury yield at 1.55% as of the 4 p.m. equity market close. Gold was 1.6% higher on the day while WTI oil closed flat at $63 per barrel. The US dollar was flat in the trading session, as measured by the US Dollar Index.
The S&P 500 rallied 1.1% on Thursday, making the 22nd new all-time high in 2021. A confluence of factors helped markets rally today, including stronger-than-expected economic data and a robust start to 1Q earnings season. A positive tone for the session was set early this morning with a host of strong economic data releases-weekly jobless claims fell to 576,000 last week, considerably lower than the 700,000 consensus estimate, marking the lowest reading in more than a year. The retail sales report also came in well ahead of expectations, with March retail sales surging 9.8% month-over-month. Corporate results are also in focus as earnings season kicked off this week with a number of large-cap bank reports; for the most part bank results have come in ahead of expectations and point to a robust economic recovery. Despite the largely positive fundamental developments on Thursday, Treasury yields moved sharply lower across the curve, with the 10-year Treasury yield falling nearly 10 basis points at one point during the session. With the move lower in yields, Thursday's equity leadership skewed defensively, with cyclicals underperforming while large-cap growth stocks led the market higher. Looking ahead, focus is likely to remain on first-quarter earnings reports, as well as economic data with several housing data points and the University of Michigan consumer sentiment report due out Friday morning.
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 support our base case year-end target of 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 7%-8% real GDP, with inflation rebounding to more than 2%, 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.