The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.






Wealth Management — April 23, 2021

What Happened in the Markets?

  • US stocks moved higher on Friday as the S&P 500 gained 1.1% to close at 4,180. With the rally, the index is now up 11.3% year to date.   
  • US equities closed the week on a strong note, as the S&P 500 gained greater than 1% to bring the index to flat on the week. Equities alternated between losses and gains from Tuesday to Friday, with Thursday's sell-off stemming from a report that the White House could look to propose an increase in the long-term capital gains tax rate for high income earners. Friday's reversal came on the back of stronger-than-expected economic data, with the Markit US Services PMI better than expected and new home sales release also stronger than analyst estimates. Next week, investor focus will remain on the continuation of Q1 earnings season, when nearly 50% of the S&P 500 companies by market capitalization report results. 
  • Nine of the 11 S&P 500 sectors were higher on the session, with Financials (+1.9%) and Materials (+1.7%) outperforming the broader market, while Consumer Staples (-0.2%) and Utilities (-0.2%) lagged. 
  • Rates were higher across the curve, with the 10-year Treasury yield at 1.55% as of the 4 p.m. equity market close. Gold was 0.4% lower on the day while WTI oil closed higher to $62 per barrel. The US dollar was modestly weaker in the trading session, as measured by the US Dollar Index.

Catalysts for Market Move

US stocks rallied on Friday as the S&P 500 gained 1.1% to close flat on the week. Markets opened the session slightly higher, only to gain momentum into the later morning and early afternoon. While Thursday the S&P 500 lost nearly 1% as investors grappled with a report that the White House would propose a plan that would raise the long-term capital gains tax rate, Friday markets staged a rally that pared all those losses and then some. It appeared that the initial concerned reaction from investors was short lived, as any such bill would likely have an uphill climb getting passed in Congress. Cyclicals led today's rally, with Financials and Materials the top-performing S&P 500 sectors, while defensives Utilities and Consumer Staples underperformed. Economic data also was strong on Friday, with the Markit US Services PMI ahead of the consensus estimate and new home sales for the month of March largely ahead of expectations. Next week, investors will be faced with a wave of Q1 earnings reports, as nearly 50% of the S&P 500 companies by market capitalization report results. 

The Global Investment Committee’s Outlook

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 rollout of 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 and our bull case of 4,175. 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 24% 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 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.

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